Henkel/Sanofi: the positives of negatives

Somebody has to spend the money eventually
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Usually, when money is lent at below-zero rates, “what on Earth are you thinking” is shouted at the lender. On Tuesday, Henkel of Germany and Sanofi of France finished as joint winners in the race to be the first public corporate paid to borrow, agreeing minus 0.05 per cent for two and 3.5 year notes, respectively. More interesting is what the borrowers want with the money, and what this means for the policy of the European Central Bank.

Lenders, when their sanity is questioned, roll out some version of “when the whole world runs mad, it is not insane to join in”. Cash must go somewhere, safes are small, and lending to the similarly low-risk German or French sovereign earns 60 basis points less. With the ECB acquiring billions of safe securities, buyers may expect a quick turn as the ECB snaps up this debt.

Now the borrowers. Sanofi, a pharmaceutical company, has net debt of just €11bn against a total enterprise value of €100bn, leaving room to borrow “opportunistically”. Having been on the acquisition trail, a little coyness is understandable. They cited “general corporate purposes” for the use of the money. Henkel, a €47bn-capitalisation business covering consumer goods and industrial solvents, said less. It hardly needs any funds: with €2bn of free cash flow that covers its dividend three times, it recently moved into negative net debt.

The point of the ECB buying corporate debt is to encourage greater issuance, the money so raised being deployed in ways that boosts economic demand. Superficially, this happy chain of events is hard to see here. Companies so financially strong do not alter their strategy when finance becomes a few basis points cheaper. But if the ECB’s open wallet has encouraged Henkel or Sanofi to greater issuance, they are now left with a problem similar to the one investors in the notes were trying to solve: what to do with this negative-yielding cash. Either they will find worthwhile investments — Henkel had an acquisition bid rebuffed last year — or the extra cash will ultimately return to investors. Some will be saved again, restarting the cycle, but some might be spent.

Negative yields send a gloomy signal: look how stagnant the economy is. But they also show the urgency with which investors send cash chasing around the economy, passed from those who cannot use it to those who just might.

Email the Lex team at lex@ft.com

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