Debt Costs Fall to Record for Euro Borrowers on Stimulus Plans

Borrowing costs for companies fell to a record in Europe as policy makers prepare more stimulus measures to prevent stagnant prices from derailing the economic recovery.

Yields on investment-grade corporate bonds in euros dropped to an average 1.7 percent, while junk-rated borrowing costs fell to 4.2 percent, according to Bank of America Merrill Lynch indexes. The data cover 1.7 trillion euros ($2.3 trillion) of securities.

European Central Bank President Mario Draghi indicated last week there would be fresh monetary stimulus in June, and another interest rate cut may top the list of options. About three-quarters of financial professionals said deflation in the euro-area is a greater threat than inflation, according to the latest Bloomberg Markets Global Investor Poll.

“Outright funding levels are very attractive for companies at the moment,” said Nick Burns, a credit strategist at Deutsche Bank AG in London. “It seems the ECB is going to look to do more easing in the near term, encouraging the low-rate environment.”

That’s drawing a surge of issuance from companies based within and outside Europe. U.S. borrowers such as Illinois Tool Works Inc. (ITW), a maker of industrial equipment, and truck manufacturer Paccar Inc. (PCAR) are selling a combined 1.3 billion euros of bonds in Europe today, according to people familiar with the deals.

India’s Bharti Airtel Ltd. (BHARTI) is marketing its second sale of euro-denominated notes since debuting in the market in December, while Pearson Plc (PSON), the publisher of the Financial Times newspaper, is issuing its first bond in the currency since 2001, data compiled by Bloomberg show.

Default Rates

“Companies from outside Europe are issuing in euros because they can improve their debt profile and issue at the lowest all-in cost on record,” said Juan Esteban Valencia, a strategist at Societe Generale SA in Paris. “Investors are increasingly going into the secondary market in credit to get extra yield. They’re encouraged by low default rates and early signs of growth.”

Investors placed $32.6 billion in credit funds this year, Bank of America Merrill Lynch research shows. Global default rates fell to 1.8 percent at the end of the first quarter from 2.27 percent in December, according to Standard & Poor’s.

To contact the reporter on this story: Katie Linsell in Madrid at klinsell@bloomberg.net

To contact the editors responsible for this story: Shelley Smith at ssmith118@bloomberg.net Jennifer Joan Lee

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