The Great American Invasion Into Europe’s Debt Market Has Begun

Do American Companies Have a New Punch Bowl in Europe?

Just when debt-addicted American companies were starting to worry that Federal Reserve Chair Janet Yellen was going to take their proverbial punch bowl away, along came Mario Draghi.

The European Central Bank president has made borrowing so cheap in the region that foreign corporations are selling record amounts of debt. Forget the deeper, bigger U.S. corporate-bond market. Borrowing in euros is all the rage these days because it’s about 2 percentage points less expensive to do so.

About 65 percent of the record 60 billion euros of investment-grade bonds sold in March came from overseas companies, according to a March 27 Bank of America report. And a lot of those sellers are based in the U.S.

“The appeal of Europe is likely to continue throughout 2015,” Fitch Ratings analysts Michael Larsson and Monica Insoll wrote in an April 1 report. They predict non-European issuers will sell twice as much euro-denominated debt this year than they did in 2014.

The trend comes down to basic math.

Yields on investment-grade bonds in Europe have fallen to 0.99 percent, compared with 2.9 percent on those in the U.S., according to Bank of America Merrill Lynch index data. Debt is so cheap in Europe that U.S. companies are saving money even if they buy currency hedges that have gotten expensive as the dollar’s soared versus the euro, according to Fitch.

Junk Bonds

And it’s not just top-rated companies. Speculative-grade borrowers including Huntsman Corp. and IMS Health Holdings Inc. have also headed to Europe to raise cash, according to Fitch.

“Riskier credits also achieve a larger discount than stronger names, and this is likely to boost the U.S. high-yield footprint in Europe,” the Fitch analysts wrote. Stimulus-driven “search for yield is pushing European investors into embracing a wider range of credits.”

Yields of 4.3 percent on euro-denominated high-yield bonds are about 2.2 percentage points lower than those on dollar-denominated notes, Bank of America Merrill Lynch data show.

So even if the Fed does hike interest rates this year, it may not matter too much to U.S. corporate borrowers. They’ve found, courtesy of Draghi, a new source of financing that is plenty cheap.

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