Unilever has issued its first euro denominated bond in five years highlighting how big European companies are increasingly turning to capital markets rather than banks to obtain corporate finance.
The seven year €750m bond, which has a coupon of 1.75 per cent, was arranged by Deutsche Bank, Goldman Sachs, Mizuho and Royal Bank of Scotland.
The soap-to-ice cream consumer goods conglomerate is the latest example of how European companies are increasingly moving towards a more US-style, market- based model of corporate finance. In the US two-thirds of corporate borrowing comes from the bond markets, while in Europe it is just one-third with the rest from banks.
Frazer Ross, a managing director of corporate debt syndicate at Deutsche Bank, said the deal would prompt more companies to come to the market and take advantage of low interest rates while they still could.
“This deal will highlight to companies that this market is wide open and credit spreads have rallied strongly since June,” he said.
“The market remains strong despite a spike in volatility a month ago.”
European non-financial corporate issuance rose nearly 20 per cent in the first half of this year to $333bn – the highest figure since 2009 – as part of a broader trend of companies taking advantage of historically low interest rates.
The loan-to-bond shift in Europe is being helped along by the Basel III global banking regulations, which are forcing banks around the world to hold more capital against loans, leading to higher rates and less lending.
Companies are also attracted by the steep fall in borrowing costs on the back of central bank action, particularly since the European Central Bank calmed markets last year with promises to save the eurozone.
Average borrowing costs on European investment grade corporate bonds have fallen from 2.8 per cent last summer to 1.8 per cent last month, according to Barclays indices, although costs have risen again in recent weeks to 2.2 per cent.
By contrast, junk bonds – those which are rated below investment grade – suffered a sell-off after Ben Bernanke, the chairman of the US Federal Reserve, hinted the central bank could begin reducing its $85bn a month of bond purchases earlier this year.
Slightly less than half of the €495bn total new debt funding for European companies so far this year has been from the loan markets, which is the smallest ever proportion and down from 60 per cent last year, according to a recent Fitch analysis.