IBM’s 2.5 Billion-Euro Bond Offering Fuels U.S. Debt Sales Surge

International Business Machines Corp. is marketing its biggest ever bond sale in euros, fueling the busiest week for deals in the currency by U.S. borrowers in six months.

The world’s largest computer-services provider is marketing 2.5 billion euros ($3.4 billion) of seven- and 12-year securities after Procter & Gamble Co. and Coca-Cola Enterprises Inc. sold a combined 1.1 billion euros of debt this week. The average yield on investment-grade bonds in euros fell to a four-month low of 2 percent, 118 basis points below dollar rates, according to Bank of America Merrill Lynch index data.

U.S. companies are seeking to lock in lower borrowing costs as the European Central Bank pledged to hold down interest rates to support the region’s nascent economic recovery. The Federal Reserve fueled speculation it will begin scaling back stimulus sooner than previously expected, with policy makers saying yesterday the U.S. economy is showing signs of “underlying strength.”

“Companies can raise funds quite a lot cheaper in Europe,” said Jens Vanbrabant, lead money manager at London-based investment firm ECM Asset Management Ltd., which has $8.6 billion in credit under management and will invest in IBM’s seven-year bonds. “Yields are a lot higher in the U.S. because the tapering sell-off was much stronger there. This should continue because the U.S. economy is growing faster, there is more focus on tapering and potential rising yields.”

Two-Part Deal

IBM is marketing 1.5 billion euros of notes maturing November 2020 to yield 42 basis points more than the mid-swap rate. It’s also offering 1 billion euros of securities due November 2025 with a spread of 68 basis points, according to a person familiar with the matter. The Armonk, New York-based company last sold debt in euros in November 2012, data compiled by Bloomberg show.

“The euro market is strong and the conditions were right to access the market,” said Doug Shelton, a spokesman for IBM in New York. Proceeds from the bond sale will be used for general corporate purposes, he said.

The average spread investors demand to hold high-grade bonds in euros dropped to 80 basis points more than swaps, the lowest in five weeks, according to Bloomberg bond index data.

“European bond investors are hungry for issuance as European corporates reduced their net borrowings this year in the wake of rating downgrades and austerity,” said Georg Grodzki, head of credit research at Legal & General Investment Management in London. “By contrast, U.S. corporates are massively buying back shares and need to raise more debt.”

PIK Deal

Elsewhere in European credit markets, AA Group Ltd., the roadside recovery and insurance division of Folkestone, England-based Acromas Holdings Ltd., sold payment-in-kind toggle notes to refinance existing debt, according to a person familiar with the matter.

AA issued 350 million pounds ($561 million) of six-year senior PIK toggle notes yielding 9.5 percent through its AA PIK Co. Ltd. unit, the person said. The notes, which can be bought back by the company after 1 1/2 years, give borrowers the option of paying coupons with cash or more debt.

NH Hoteles SA, Spain’s largest business hotel chain, is selling 250 million euros of six-year senior secured notes to yield about 7 percent. The Madrid-based company is also marketing 250 million euros of convertible notes paying a coupon of 4 percent to refinance debt, according to a regulatory filing.