Bankers make poor wordsmiths. When foreign companies issue bonds in New York, they are known as “Yankee bonds”. So what name is chosen when the trend is the opposite, and US companies issue in euros? “Reverse Yankees”, of course.
The nomenclature is inelegant but it rolls off bankers’ lips these days. Euro-denominated issuance by US companies and financial institutions in 2015 has already exceeded €33bn — three times as much as in the same period last year, according to Dealogic.
Big-name issuers include Coca-Cola, Warren Buffett’s Berkshire Hathaway investment vehicle and, this week, Kinder Morgan, America’s largest energy infrastructure company. Apple issued in euros late last year and in Swiss francs last month.
The “reverse Yankee” surge is a fillip for Europe’s corporate debt markets at a time when policy makers are keen to boost alternatives to bank financing. It also says a lot about the post-2007 crises world in which big international companies tap funding where the terms are most advantageous but, crucially, also diversify investor bases and hedge against currency turmoil.
“The dollar, euro and sterling markets — sometimes you can add in Swiss francs — have become the playground of international companies,” says Demetrio Salorio, global head of debt capital markets at Société Générale. Not just US companies are raising funds in euros. Mainland China-based companies have shunned “dim sum” bonds, or offshore renminbi debt, and sold almost as much euro-denominated debt as in the whole of 2014.
The big attraction is that the cost of borrowing in euros is at historic lows and is cheap relative to dollar funding. While the European Central Bank this week launched quantitative easing, the US Federal Reserve is on track to raise US interest rates later this year. Until recently, the imbalance between dollar and euro markets had meant a US company could issue in euros, arrange a currency swap deal to convert into dollars — and still pay significantly less than it would have paid to raise the same sum originally in dollars.
With reverse Yankee issuance accounting for a fifth of all euro-denominated corporate and bank issuance so far in 2015, the surge is establishing benchmarks and broadening European capital markets in terms of the types of companies issuing and the maturity spectrum; Coca-Cola, AT&T and Berkshire Hathaway all had tranches of 20-year bonds.
It does not help the eurozone where help is most needed — giving small businesses access to finance. But bankers report US companies are lifting energy levels in European debt markets. “The Americans shoot and move on,” says one banker. “If they decide to do a transaction, they move fast, raise the money, and boom!”
If US companies offer a few extra basis points of yield to get a deal done, that is good news for yield-starved European investors. Reverse Yankee issuance helps offset shortages of investment-grade bonds caused by the ECB’s asset purchase programme. It enables portfolio managers restricted to investing in euros to buy into US companies. “Berkshire Hathaway is a fantastic name to have in your portfolio if you are a eurozone investor,” says Pascal Duval, European chief executive at Russell Investments.
For US companies, the cost advantage of issuing in euros has faded recently. Heavy use of currency swap deals has driven up their price, so bankers think reverse Yankee issuance will slow — the latest deals would have been several weeks in the pipeline. But issuing in euros could still make a lot of sense. The intention in many of this year’s deals was not to swap funding back into dollars but to finance European operations, hedge euro cash flows and lock in exceptionally low worldwide borrowing costs.
If they expect the euro to keep falling, it makes sense for foreigners to issue debt in the single currency. Meanwhile, tapping different markets widens a company’s investor base. That not only allows finance directors to take advantage of changing financial conditions, it reduces the risk of being caught out in the next crisis. After Lehman Brothers’ collapse in late 2008, European markets in effect closed down for periods.
More euro debt and less dollar funding is likely to reinforce the dollar’s appreciation — which will worry some. But the bigger story is also about something easier than a reverse Yankee for the ordinary person to understand: the globalisation of finance.
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