Microsoft, AT&T Cross Atlantic for Euro RatesKatie Linsell
Microsoft Corp. and AT&T Inc. are among U.S. borrowers selling the most bonds in Europe since the start of 2008, taking advantage of record-low borrowing costs that outstrip dollar rates.
American issuers raised 17.2 billion euros ($22.5 billion) from bond sales this year, nine times the amount for the same period in 2012, according to data compiled by Bloomberg. The average yield on investment-grade euro corporate bonds fell to an unprecedented 1.75 percent yesterday, or 89 basis points below comparable dollar notes, Bank of America Merrill Lynch indexes show. That’s the biggest discount since June 2010.
The European Central Bank cut its benchmark interest rate to a record 0.5 percent yesterday as it tries to lift the euro-region out of recession, encouraging companies to take advantage of cheap funding. In the U.S., where the economy is expanding at a 2.5 percent annual rate, the Federal Reserve will probably reduce its monthly bond buying in the fourth quarter as it begins to scale back its record stimulus, according to economists in a Bloomberg survey.
“U.S. companies will issue where they think they can borrow cheaply and where there’s significant demand,” said Craig Veysey, the head of fixed income at Sanlam Private Investments Ltd. in London, part of the Sanlam Group, which oversees $72 billion of assets. “The huge drop in yields we’ve seen over the last month, in particular in Europe, would have meant that it’s easy for U.S. issuers to get their deals away.”
Bond sales from U.S. companies accounted for about 6 percent of total euro issuance this year, from 0.5 percent for the same period last year and the most since about 10 percent in 2008, data compiled by Bloomberg show.
Microsoft raised 550 million euros on April 25 from 20-year bonds in a debut sale in the currency that paid 2.625 percent. That’s the lowest coupon offered in Europe for similar-maturity, non-financial corporate notes, Bloomberg data show. Investors placed 7 billion euros of bids for the notes, according to a person with knowledge of the transaction on April 26.
The debt sale was “opportunistic,” said Peter Wootton, a spokesman for Redmond, Washington-based Microsoft. It will help the company reduce its cost of capital and the pricing was “very attractive” for 20-year securities, he said. Microsoft is rated AAA by Standard & Poor’s and Aaa at Moody’s Investors Service, while Fitch Ratings ranks it a level lower at AA+.
“There is a shortage of high-quality credits like Microsoft in Europe, allowing the company to issue at an extremely attractive level,” said Geraud Charpin, a fund manager at Bluebay Asset Management Ltd. in London which oversees $55 billion. “It really showed that there is a glut of money in the euro market that needs to be invested.”
AT&T, the largest U.S. telephone company, raised 1.25 billion euros from 10-year securities in March priced to yield
2.524 percent, according to a person familiar with the matter. That compares with 2.634 percent yield on the Dallas-based company’s $1.5 billion of bonds of the same maturity sold in December, Bloomberg data show.
“We were pleased with the terms of the transaction,” said Sarah Lubman, an external spokeswoman for AT&T based in New York, who declined to confirm whether the company converted the proceeds of its euro bond sale into dollars.
The cost for companies to convert euro interest payments into dollars has increased from a 19-month low in January. The cost of swapping using the five-year cross-currency basis swap was little changed at 23.5 basis points below Euribor, up from
19.5 basis points on Jan. 30, the cheapest since June 2011.
As of the end of 2012, AT&T had swapped all its foreign currency-denominated debt into dollars using cross-currency swaps, the company said in its annual report on Feb. 22.
Coca-Cola Enterprises Inc., the third-largest independent bottler of the bestselling soft drink, sold 350 million euros of 12-year bonds on April 29 to yield 78 basis points more than swaps. That’s less than the 94 basis-point average spread for companies including PepsiCo Inc. in Bank of America Merrill Lynch’s Global Consumer Non-Cyclical Food & Drug Retailers and Pharmaceuticals Index, which also contains Atlanta-based Coca-Cola Enterprises’ debt.
“U.S. borrowers are sitting up and noticing just how strong the euro market is,” said James Tayler, a corporate bond syndicate banker at Royal Bank of Scotland Group Plc in London which helped manage Coca-Cola Enterprises and Microsoft’s deals. “The market is offering strong execution in longer duration trades, where previously tenors of more than 15 years have been the preserve of the sterling and dollar markets.”
The average maturity of bonds in Bank of America Merrill Lynch’s euro index is 5.1 years, compared with 10.1 years for dollars and 12.1 years for sterling securities.
Belden Inc., a maker of networking equipment, sold its first euro bonds in March. The company, which has junk ratings of Ba1 by Moody’s and BB at S&P, issued 300 million euros of 10-year securities that were priced to yield 5.5 percent, the same yield as on its similar dollar notes of the same maturity sold in August, according to Bloomberg data.
Average yields on non-financial high-yield bonds in Europe have held within a basis point of the record 5.35 percent low reached on April 29, according to Bank of America Merrill Lynch index data.
“Belden generates a meaningful portion of its operating income from our European operations,” said Matthew Tractenberg, head of investor relations at St. Louis, Missouri-based Belden. “The debt issued in March allows the company to pay euro denominated interest with those euro denominated profits.”
Investors betting that the ECB would likely cut interest rates poured $1.1 billion into high-grade bond funds in the week ending April 24 and $970 million into high-yield securities while pulling $78 million from equity funds, according to a Bank of America Corp. April 26 report.
“There is a window for U.S. issuers to come to the European market now as we can’t assume that this low level of volatility will last forever,” said Veysey. “It’s a case of taking advantage of the market place as much as you can to issue at the best rates available.”
Elsewhere in credit markets, International Business Machines Corp. obtained a record-low 1.625 percent coupon on seven-year dollar-denominated debt and tied an all-time low for three-year securities. The market for corporate borrowing through commercial paper contracted for a third week. Supervalu Inc. is seeking to lower the rate on a $1.5 billion loan it obtained earlier this year to support the sale of five supermarket chains to an investment group led by Cerberus Capital Management LP.
The cost of protecting corporate debt from default in the U.S. fell to a five-year low. The Markit CDX North American Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, dropped 3.5 basis point to a mid-price of 74.3 basis points, according to prices compiled by Bloomberg.
The Markit iTraxx Europe Index, tied to 125 companies with investment-grade ratings, decreased 3.3 basis points to 91.5 at 5:12 p.m. in London. In the Asia-Pacific region, the Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan fell 0.8 to 106.
The indexes typically fall as investor confidence improves and rise as it deteriorates. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
The U.S. two-year interest-rate swap spread, a measure of debt market stress, fell 0.03 basis point to 14.01 basis points. The gauge narrows when investors favor assets such as corporate bonds and widens when they seek the perceived safety of government securities.
Bonds of Cupertino, California-based Apple Inc. were the most actively traded dollar-denominated corporate securities by dealers, accounting for 4.6 percent of the volume of dealer trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The iPhone maker sold $17 billion of bonds on April 30 in the biggest corporate offering on record.
IBM’s $1.25 billion of notes due May 2020 beat a 1.65 percent rate on $750 million of debt sold last July by semiconductor maker Texas Instruments Inc., Bloomberg data show.
The largest computer-services provider also sold $1 billion of three-year debt at a 0.45 percent coupon, matching a record-low for that maturity obtained by Apple, Texas Instruments, Unilever Plc and Walt Disney Co., Bloomberg data show.
The seasonally adjusted amount of U.S. commercial paper dropped $12.4 billion to $997.4 billion outstanding in the week ended May 1, the Fed said yesterday on its website. That’s the lowest level since the market touched $968.6 billion in the period ended Nov. 14.
Corporations sell commercial paper, typically maturing in 270 days or less, to fund everyday activities such as payroll and rent.
The S&P/LSTA U.S. Leveraged Loan 100 Index rose 0.02 cent to 98.59 cents on the dollar, the highest since July 2007. The measure, which tracks the 100 largest dollar-denominated first-lien leveraged loans, has gained 2.79 percent this year.
Speculative-grade loans and high-yield bonds are rated below Baa3 by Moody’s and lower than BBB- at S&P.
Supervalu, the third-largest U.S. grocery chain, is proposing to pay interest on the covenant-light loan due in March 2019 at 3.5 percentage points more than the London interbank offered rate with a 1 percent minimum on the lending benchmark, down from 5 percentage points more than Libor with a
1.25 percent floor, according to a person with knowledge of the transaction. Credit Suisse Group AG is arranging the financing.
In emerging markets, relative yields declined 4 basis points to 288 basis points, or 2.88 percentage points, according to JPMorgan Chase & Co.’s EMBI Global index, which had averaged
281.2 this year.