Keep Them Doggies Rollin'

European Corporates Go West

Investors and issuers are lovin' them dollar bonds from Europe.
At Closing, May 25th
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European companies are rushing to sell bonds in dollars. After all, that's where the investors are.

So far this year, dollar-denominated syndicated new bond sales have exceeded $475 billion, a record for any quarter. A surprising amount -- about 22 percent -- has come from European issuers. Within this, about $81 billion is from euro-area companies, including banks, according to Bloomberg First Word's Paul Cohen. This isn't what the European Central Bank had in mind when it fired up its printing presses, and now it's going to have to deal with the consequences.

These dollar deals look to be a win-win: investors love them because the market's incredibly liquid, there's a huge range of issuers and coupons for non-financial borrowers above 4 percent are almost double what you'd get in Europe, according to Bank of America Merrill Lynch data.

Dollar Bond Bonanza

Euros are great for safe credits to issue new debt, but are nowhere near as generous for funding the real economy, compared to the dollar market

Source: Bloomberg

2017 year-to-date issuance up to March 17th. Syndicated debt above $100 million in issue size with maturity greater than 18 months

And it's a boon for European companies, thanks to a favorable turn in the cross-currency basis swap. This measure of what it costs to convert dollars into euros shows that companies can earn about 35 extra basis points by issuing first in the greenback and then shifting the proceeds into euros, rather than just borrowing in their home currency outright. In the pre-crisis days there wasn't much of a difference, but the shortage of dollars since 2008 has created opportunities that some issuers can exploit. 

Spot the Crisis

The discount for issuing in dollars and converting the proceeds into euros, rather than issuing in euros outright, is about 35 basis points

Source: Bloomberg

What's not to like? Nothing, as Europe's top-tier credits have found. Corporates such as Heineken NV have been able to bring very popular deals raising $1.75 billion in 11 and 30 year maturities (good luck issuing that long in Europe), while national champions such as ABN Amro Group NV have raised $1.5 billion in 11-year subordinated debt.

It's a different story for the continent's more pedestrian borrowers, who lack the name recognition to draw a global audience. They're stuck at home, where the syndicated corporate bond market hasn't been particularly friendly lately.

European Slowdown

Corporate new bond issuance in euros so far this year is little better than in 2016, when China's currency crisis and an early Easter torpedoed the market

Source: Bloomberg

Comparable year-to-date issuance up to March 22 for all years. Syndicated debt above 100 million euros in issue size with maturity greater than 18 months

You can't really blame European investors for a spot of self-rejection. The ECB's eight-month stint of quantitative easing via the corporate bond market has driven yields right into the ground. From June to February, central bank purchases have topped 67 billion euros ($72.3 billion), and the average spread over government debt is a mere half a percentage point.

This continues a trend that started last year. Foreign investors became net sellers of euro-denominated government debt in 2016, the first time this has happened since the common currency was introduced. Having driven so many people away, the ECB now has far fewer friends to help with the buying needed to keep the fixed income markets open.

Yields are now so meager that investors are markedly reluctant to rotate out of existing holdings and into new deals. Europe's year of political risk also isn't doing much to draw in buyers to new corporate credit. So the 400 billion euros of total issuance so far this year looks impressive, but is actually weighted heavily towards the highest quality names -- the bulk of it is quasi-governmental credits and senior bank paper being refinanced at super-low rates. 

Credit Suppresant

The ECB's corporate QE has dampened spreads even in subordinated financials

Source: Markit, Bloomberg

The regular corporate issuer is not getting as much of a look-in. That's not a great result for the ECB, since its quantitative easing program was intended to engineer cheaper funding for weaker credits that the banking system is struggling to provide for.

That doesn't mean the market's a total disaster. If it's good enough for Volkswagen AG to hazard its first post-scandal new issue, something has to be working. And while the market's a bit thin now, it could pick up in the next few weeks as the later Easter holiday compared to last year, and a whole month to go before the French elections, leave space for some riskier names to try to raise money.

It's still an unnatural situation that so much issuance is going overseas, which ought to worry any central bank. And the lack of trickle-down benefit for weaker credits is a problem right on the ECB's doorstep.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Marcus Ashworth in London at

    To contact the editor responsible for this story:
    Jennifer Ryan at

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