Sanofi Finds Money Almost Free in Draghi-Fueled Euro Bond Market

  • Sanofi sells record-low yielding corporate bond in euros
  • ECB's plan to expand easing measures drives down cost of debt

European companies are inching ever closer to borrowing for free as the central bank expands stimulus.

Sanofi, France’s biggest drugmaker, sold bonds in euros with the lowest yield on record for a non-financial company on Tuesday, according to data compiled by Bloomberg. In the secondary market, about 14 billion euros ($16 billion) of highly rated corporate bonds are trading with yields below zero, the data show.

European Central Bank President Mario Draghi’s plan to start buying corporate bonds alongside asset-backed securities and government notes is driving down debt costs in the region. There are signs that years of stimulus are starting to encourage companies to borrow and issuance this month is close to a record after Anheuser-Busch InBev NV raised 13.25 billion euros to fund its takeover of SABMiller Plc.

“The situation might be a harbinger of things to come,” said Suki Mann, founder of bond market commentator CreditMarketDaily.com. “That is tighter spreads, low corporate bond yields and lower coupons.”

Draghi’s stimulus measures, which included lowering the deposit rate to minus 0.4 percent, have so distorted Europe’s credit markets that investors are paying to park their cash with some companies.

Traders are quoting a yield of minus 0.028 percent on Royal Dutch Shell Plc’s 2.5 billion euros of bonds maturing in May 2018, according to data compiled by Bloomberg. Swiss drug producer Roche Holding AG’s 1 billion euros of notes due June 2018 are quoted at minus 0.031 percent, the data show.

That hasn’t yet translated to Europe’s primary market, but that could still happen, said Nick Denman, managing director in debt capital markets for Europe, the Middle East and Africa at JPMorgan Chase & Co. in London.

“Is there any reason why investors won’t buy corporate bonds sold with a negative yield?” said Denman. “I see no reason why they wouldn’t. They may not like it, but it costs them to hold cash. So long as money remains in this asset class, then investors may feel they have little choice.”

Deal Increased

Sanofi, based in Paris, priced 500 million euros of three-year notes to yield 0.05 percent, according to a person familiar with the matter, who asked not to be identified because they’re not authorized to speak publicly. The bonds, which won’t pay coupons, were part of a 1.8 billion-euro sale, the person said.

The pharmaceutical company increased the three-part sale from an initial target of 1.5 billion euros, according to the person.

Sanofi said the deal allows it to cut debt costs and extend the average maturity of its borrowings, according to a statement. A spokeswoman for Sanofi declined to comment further on the bond sale.

It also priced 600 million euros of eight-year notes to yield 0.705 percent, and 700 million euros of 12-year securities to yield 1.203 percent, the person said. Yields on some of Sanofi’s existing securities in the single currency dropped below zero last week, according to data compiled by Bloomberg.

“Negative yields, for corporate issuance?” said Sarwat Faruqui, managing director and head of corporate syndicate at Citigroup Inc. in London, which helped arrange the sale. “I guess never say never, although I don’t expect there to be high volumes.”

Record Sales

The average yield investors demand to hold investment-grade corporate bonds in euros dropped to 1.09 percent Tuesday, the lowest since April, according to Bank of America Merrill Lynch index data.

Corporate bond sales in euros surged to 48.5 billion euros so far this month, according to data compiled by Bloomberg. The previous record of 49.8 billion euros was set in March last year, the data show.

Even though borrowing costs are falling, not all European companies are rushing to borrow. The worsening outlook for the global economy is deterring investment in new factories and equipment, leaving some corporate treasurers unconvinced.

“The ECB’s plan to buy corporate bonds doesn’t change our strategy,” said Oliver Wolfensberger, head of corporate finance and financial risk at British American Tobacco Plc. “It’s a nice idea that investors would pay a company to borrow, but realistically that is not likely.”

Borrowing costs, though, are falling across maturities as investors reach further out. The average yield they demand to hold euro-denominated corporate securities maturing in 10 years or more has dropped to 1.99 percent, the lowest since May, Bank of America Merrill Lynch index data show.

“There’s very little to tempt investors in terms of yield on the table,” said Gordon Shannon, a portfolio manager at TwentyFour Asset Management, which manages about 5.5 billion pounds ($7.9 billion). Shannon didn’t buy Sanofi’s bonds.

“As yields get smaller, you’re not getting compensated for the risk you’re taking, even if the borrowers are highly-rated,” he said.

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