No Place Like Home for European Investors Wary of Bond Touristsby
Some fund managers planning to avoid foreign euro bonds
Barclays forecasts another record year of cross-border sales
Europe’s bond-market tourists may be outstaying their welcome.
After a record amount of euro-denominated bond sales by non-European companies last year, buyers are finding that the debt has left them with greater losses than debt issued by domestic firms. That’s prompting some investors to say they’ll avoid bonds sold by foreign issuers this year, even as Barclays Plc projects such issuance to reach 105 billion euros, surpassing last year’s total.
“We’re likely to be highly selective,” said Duncan Warwick-Champion, the London-based co-head of global credit research at Wells Fargo Asset Management, which has about $488 billion of assets under management. “We bought a broad spectrum of issues when the market was hot, but became far more selective as we went through the rest of 2015.”
Money managers at firms including TwentyFour Asset Management LLP and Invesco Ltd. will favor European securities because a sluggish domestic economy is deterring the region’s treasurers from risk taking. While record-low borrowing costs in euros relative to dollars will remain a pull for overseas issuers in 2016 after Mario Draghi extended central bank stimulus, the fund managers are being put off by the borrowing binge in the U.S. that’s left companies owing more interest than ever before.
American borrowers, buoyed by improving economic conditions at home, are adding to their debt loads as they seek to fund share buybacks and M&A deals, according to Lyndon Man, a fund manager at Invesco. Whereas in Europe, companies are deleveraging, he said.
“We prefer euro paper from European domiciled issuers,” London-based Man said. “We are less encouraged to go into the reverse-Yankee space.”
TwentyFour Asset Management also said it’s not tempted by U.S. issuers in Europe’s bond market because of the risk they’ll spend proceeds rewarding shareholders or funding leveraged takeovers.
Bonds from U.S. companies, the biggest overseas borrowers in Europe’s bond markets, lost an average of 1.3 percent last year, according to Bank of America Merrill Lynch index data.
Discovery Communications Inc.’s 600 million euros of 1.9 percent notes declined about 15 percent, according to data compiled by Bloomberg. Moody’s Investors Service placed Discovery’s ratings under review for a downgrade in November after the company increased its leverage target. Moody’s also said this year it expects leverage to rise at Kinder Morgan Inc., whose euro bonds were among the worst-performing securities from foreign issuers in 2015.
ECB easy-money policies that made it cheaper than ever to borrow in the region ensured overseas issuance by non-financial, investment-grade companies grew to a record 88 billion euros in 2015, with deals by U.S. firms outstripping sales by the companies of any other nation, according to Barclays. They were attracted to yields in the single currency that averaged 1.2 percent compared with 3.4 percent on dollar bonds, Bank of America Merrill Lynch index data show. The yield difference between the two was 2.4 percentage points yesterday, the data show.
Investors lost 2.8 percent on euro bonds of Australian issuers and 5.5 percent on Mexican firms’ notes in the currency, the data show. Meanwhile, returns on total European company debt were little changed.
With the ECB hoovering up assets as part of its quantitative easing program, investors will be grateful for overseas bonds sold in the region, said Luke Hickmore, a senior investment manager at Aberdeen Asset Management Plc.
“Diversification is a net benefit to everybody,” Hickmore said. “The more names we have the better. A negative is if it goes too far. If we get continuing aggressive issuance from overseas borrowers, that will run into exhaustion at some point.”
After big-name borrowers dominated the market in 2015, investors may not be so eager to buy into the lesser-known overseas companies TwentyFour expects will head to Europe this year.
Gordon Shannon, a London-based portfolio manager at the company, which has about 5 billion pounds ($7.3 billion) under management, said the company is adding to its dollar-denominated debt holdings as that offers better relative value than U.S. issuance in euros.
“I don’t think these will necessarily be as well received, especially given the extra spread attainable by buying U.S. dollar paper,” said Shannon. “There just isn’t the same level of differential to tempt us into U.S. names issuing in euros.”