Improved all-in pricing and the need for euro liabilities to match business profiles are bringing US corporates to Europe, a move that is proving lucrative for Deutsche Bank.

First a trickle, then a stream, and now a flood. US corporates, increasingly unfamiliar names among them, are queueing up to enjoy the benefits of borrowing in the euro capital markets. And one of the more active banks assisting them is Deutsche Bank.

By the end of the first week of March this year, US corporates had issued €32.3bn in bonds year-to-date, more than double the €15bn in the same period in 2014, according to Deutsche Bank and Bloomberg. "You can't annualise the present run rate, but this will be the busiest year by far for North American issuance in euros, by volume, by number of deals and by number of borrowers," says Frazer Ross, a Deutsche Bank managing director, global risk syndicate.

Last year was a record year for euro-denominated reverse Yankees, as they are known, with €67.9bn of issuance, but this level of popularity is a relatively recent phenomenon. For most of its 15-year existence, the euro bond market has been used mainly by European issuers, with only a few early US pioneers like GECC, IBM and Procter & Gamble. As global companies (and household names), they found it useful as a hedging arrangement as well as a diversification of their investor base. They were joined a few years later by other familiar names, such as AT&T, which had no European assets but were primarily interested in more competitive funding.

Before the financial crisis, the basis swap differential ­– crucial in getting the sums to work – had been close to zero. After Lehman Brothers blew up, it went out to a negative 80 basis points (bps). US corporates could no longer issue at a level which suited them while simultaneously attracting European investors. Instead, European corporates were issuing profitably in dollars.

By the time the basis swap was recovering and heading back to zero, the eurozone crisis had erupted, and US boards could justifiably ask any CFO with a euro proposal whether the currency would even exist in the near future. Mario Draghi's "whatever it takes" speech in the summer of 2012 helped to settle fears, however, and that year's reverse Yankee issuance more than doubled to €20.4bn. The taper tantrum a year later and a repricing in the US market boosted 2013 volumes to €50.8bn.

Choose your maturity

The divergence between the two markets was even more pronounced by the fourth quarter 2014, as investors became convinced that the European Central Bank was about to start quantitative easing (QE). The procession of new US names into the euro market grew. "The headline coupon differential is attractive," says Helene Jolly, a Deutsche Bank vice-president, global risk syndicate. "If you can issue in US dollars at 2.25%, in euros you can issue 150bps lower, at 0.75%."

US borrowers also like the fact that they can issue in maturities which would struggle to find a berth in the dollar market. In the US, where bonds are priced against US Treasuries, the standard maturities are five, 10 and 30 years. In Europe, where bonds are priced against swaps, investors are more flexible.

"In the US, the maturity buckets are well-defined," says Ms Jolly. "But in Europe, there are no on-the-run maturities – it's more bespoke. If you want seven-and-a-quarter years, you can have it."

The result is that US issuers do not generally choose five-, 10- or 30-year maturities for their euro deals. When Mondelez (the former Kraft Foods) sold €2bn of euro-denominated bonds recently, with Deutsche Bank as a joint bookrunner, it opted for seven-year (€500m), 12-year (€750m) and 20-year (€750m) tranches. The coupons were 1%, 1.625% and 2.375% respectively. The offer attracted more than €10bn from nearly 400 accounts. The company did include a 30-year piece, but that was tailored to sterling investors. The £450m (€629.5) tranche with its 3.875% coupon pulled orders of £1.6bn from 150 accounts. Investor demand was such that all the bonds were priced with negative to flat new issue commission versus the issuer's outstanding 2021 paper.

"The Mondelez deal was really interesting, because they were buying US dollar debt and replacing it with euros," says Ms Jolly. The proceeds of the €2bn euro transaction were earmarked, among other things, to fund a $2bn tender offer for notes due between 2016 and 2040.

The price is right

The fact that the euro has been weakening against the dollar, and is expected to continue doing so, provides more rationale for the reverse Yankee. If the currency gets weaker still, the issuer's liability in dollars will be lower in future. That applies to all issuers. For those with a European business, there is an even more compelling reason. Having taken a hit on their fourth-quarter 2014 earnings thanks to the falling euro, they are even more aware of the need to hedge.

They could buy derivatives to hedge with, but the current climate does not encourage that. Or they can create European liabilities to match their European assets. "They will only do that if it is competitive to US funding," says Mr Ross. "There was a time when euros were competitive for two out of every 10 US borrowers. Now anything from eight to 10 are showing significant arbitrage in euros."

Another draw for US issuers is the knowledge that Europe can deliver in sufficient size to make the transaction worth doing. That was not always the case, but now it is. "QE is pushing investors out of bunds and into credit," says Mr Ross. "And they want to buy US debt because the US economic backdrop is improving."

Coca-Cola recently sold €8.5bn of paper in the second biggest euro bond deal ever, drawing more than €20bn in orders. While Deutsche Bank was not on that particular deal, Mr Ross says that it, and others like it, have put paid to the US perception that Europe cannot do size. "It demonstrated to CFOs and CEOs in North America that, if it has a large deal to do, it is no longer correct to say that Europe can't deliver size," he says.

Deutsche Bank was joint bookrunner on AT&T's latest return to the European market, to raise €2.5bn in 8.5- and 20-year notes, with respective coupons of 1.3% and 2.45%. The order book reached €10.4bn. It was slightly skewed towards the 8.5-year tranche, for which six investors placed orders for €100m-plus. Ten investors placed €100m-plus orders for the 20-year tranche which, at €1.25bn, was the second largest corporate 20-year ever in the euro market.

Unfamiliar names

A singular feature of the market right now is that household names such as AT&T are being joined by names that few Europeans have heard of. These medium-sized companies are tuning in to the benefits that Europe is offering them – a coupon pick-up, diversification of investor base, taking pressure off their US spreads.

Priceline, an American travel discount website, is an example. Deutsche Bank was joint bookrunner on its €1bn, 12-year offering. With a coupon of 1.8%, it drew more than €3bn of orders. The company has a Netherlands-based business, called Booking.com, so has a need for euros. "It achieved close to 200bps lower in yield," says Mr Ross. "That's an awful lot of savings."

Another example is TE Connectivity, formerly Tyco Electronics, which designs and manufactures connector and sensor components. In February, it sold €550m of eight-year bonds paying 1.1%.

The basis swap is moving further back into negative territory, having gone from -5bps to about -15bps, and the gap will probably widen further. Mr Ross believes that the trend will damage the reverse Yankee trade less than might be supposed. "Traders assume that all the proceeds of these deals get swapped back into dollars, but that's the wrong assumption," he says. "A large part of the market is made up of issuers coming to Europe because they need euros."

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