As reverse yankees bounce back from 2018's dip, attracting issuance of differing ratings and from different countries, Deutsche Bank's EMEA investment grade credit team has been quick to get in on the action. Edward Russell-Walling reports.

Team 0419

From left: Sam Wareham, Frazer Ross, Henrik Johnsson, Helene Jolly

After a bumper year in 2017, issuance of reverse yankees halved in 2018, thanks partly to US tax changes. But this year they are staging a comeback and of the 18 deals launched in the first quarter, the Deutsche Bank Europe, Middle East and Africa (EMEA) investment grade credit team was active on 12.

A yankee is a US dollar bond issued in the US by a foreign entity, while a reverse yankee is a bond issued outside the US by a US company, usually investment grade and in a currency other than the US dollar. While not a new idea, it has become more popular in recent years, as US companies realised it could sometimes be cheaper to borrow in euros and swap back to dollars. Others, with assets in Europe, discovered that borrowing in euros was a useful balance sheet hedge.

More recently still, large US borrowers have come to understand that the euro market is deep and flexible and they can borrow in size when they have big bills to pay in mergers and acquisitions (M&A).

Back in favour

Reverse yankee volumes in 2017 reached €93bn, but fell back to €43bn in 2018. This was largely because of the introduction of a permanent repatriation tax holiday for US companies, but also because of market volatility. This year, however, volumes in the first quarter were already two-thirds of the previous full year’s issuance, at €29.5bn.

“We went into the first quarter thinking the market would be different,” says Henrik Johnsson, Deutsche Bank’s London-based co-head of global debt capital markets (DCM). “European investors were underinvested, sitting on cash because there wasn’t much primary. If they wanted to put size to work, it made sense to bring big US global companies [to market] in euros.”

Mr Johnsson’s US-based opposite number is co-head of global DCM Marc Fratepietro, who points to the sheer breadth of 2019’s reverse yankee activity. “We have had issuance from five industries already: finance; technology, media and telecoms; consumer; real estate; and healthcare,” he says. “The proceeds have been broad based, going to refinancing, M&A and green spending, and the ratings mix has been from low BBB to high A and AA.”

The Deutsche Bank team claims that, unlike other houses that are dollar- or euro-centric, it is currency agnostic. “Clients like the fact that we are unbiased,” says Mr Johnsson. “It doesn’t matter if the client prints in dollars, euros, sterling or yen as long as we deliver the right solution.”

IBM's euro record

The biggest deal of the year so far has come from IBM, which successfully raised €5bn in January. This was the company’s largest ever euro deal, and the largest euro transaction on record in the technology sector. While the proceeds were tagged for general corporate purposes, there is a whiff of M&A funding about it – the market is expecting a multi-billion IBM bond to help pay for the recent $34bn acquisition of Red Hat, a US software company. 

With Deutsche Bank as joint bookrunner alongside Barclays, BNP Paribas, Citi, JPMorgan and UniCredit, the issue included four-, six-, eight- and 12-year tranches. It attracted nearly €20bn in orders, led by German and UK fund managers, allowing guidance to be released 15 basis points (bps) to 20bps inside initial pricing thoughts (IPTs). The largest single order was for €848m. 

The deal as executed consisted of $1.75bn of four-year notes priced at mid-swaps plus 45bps (0.375% coupon), €1bn six-year with a 70bps spread (0.875%), €1bn eight-year at plus 80bps (1.25%) and €1.25bn 12-year at plus 95bps (1.75%). The final pricing implied 7bps to 10bps of new issue concession.

Altria lights up

Tobacco group Altria was another recent acquirer in the market in 2019 with a reverse yankee, an inaugural euro deal for the name that raised €4.5bn. Deutsche Bank, Barclays, Goldman Sachs and JPMorgan were joint bookrunners. The principal aim of the exercise was to prepay borrowings used to finance the $12.8bn purchase of a 35% stake in e-cigarette maker Juul Labs.

The deal was unveiled after a four-day pan-European roadshow, during which the company met with more than 60 investors. It announced benchmark four-, six-, eight- and 12-year euro transactions with IPTs of mid-swaps plus 130 area, 160 area, 190 area and 250 area, respectively. The final order book stood at €11.6bn, and the tranches priced at €1.25bn mid-swaps plus 108bps (1% coupon) for the four-year, €750m plus 145bps (1.7%) for the six-year, €1bn plus 175bps (2.2%) for the eight-year and €1.25bn plus 228bps (3.125%) for the 12-year.

Frazer Ross, Deutsche Bank’s head of investment grade credit syndicate for EMEA, says it is a myth that the US market is bigger and deeper than Europe. “We have always been able to deliver the size required from our US issuer base. It is not a question of our ability to deliver, it is often a question of our collective ambition,” he says.

Euro first

When issuers such as Altria and IBM are looking for M&A financing, for many years until now they have executed the dollar transaction first. “This year, both of them did the euro deal first,” says Mr Ross says. “If you sequence it properly you can save a lot of money – because you’re saying to the US investors: ‘We don’t need you.’ There must be price competition.”

Other bankers say that including a euro tranche in a big transaction keeps the US market honest. While the US investor base is very concentrated, with a limited number of very big players, in Europe it is more fragmented. So it is more more competitive, and more flexible on currencies and tenors. 

Helene Jolly, a Deutsche Bank director for DCM syndicate, underscores the point, noting that US investors will only invest in certain tenors. “In Europe you can do any tenor you want,” she says. “If you want seven-and-a-quarter years, there will be demand for it.”

Early in 2019, Deutsche Bank and Barclays were bookrunners on Emerson Electric’s inaugural euro transaction and first non-US dollar exercise. It raised €1bn in two tranches. A €500m short seven-year bond with a 1.125% coupon was priced at mid-swaps plus 90bps, while a €500m short 11-year paying 2% was priced at a spread to mid-swaps of 120bps.

Digital Realty, a real estate investment trust, returned to the euro market to price a seven-year €850m green bond with a 2.5% coupon, yielding 2.51%. Joint bookrunners were Deutsche Bank, Bank of America Merrill Lynch, Barclays and JPMorgan. Responding to a reverse enquiry, Digital Realty then tapped two earlier issues with a £150m ($195.2m) reopening of its 3.75% 2030 notes, and a €225m tap of its 2.5% 2026 notes. Deutsche Bank was sole bookrunner. “We get a lot more repeat business than we should if you look at the lending relationships,” says Mr Ross. “Clients trust us.”

Range of deals

Other noteworthy deals on which the Deutsche Bank team has worked include €3.5bn of two-year floating rate notes, with 3.5-, 7.5- and 12-year fixed-rate notes for Coca-Cola. “This was a refinancing exercise,” says Sam Wareham, Deutsche Bank's vice-president for DCM syndicate. “The company had €3.5bn of debt maturing. It achieved the tightest levels year-to-date at the time on the two-, 3.5- and 7.5-year tranches.”

Ford Credit priced a €1.25bn 3.01% five-year and £600m 4.535% six-year deal. In its second euro offering, FedEx priced a €640m 0.7% long three-year deal. In its third euro deal, Pepsico priced a €500m 0.75% eight-year and a €500m 1.125% 12-year transaction; Deutsche Bank was an active bookrunner on all three.

For the rest of the year, the team is expecting higher reverse yankee volumes than in 2018. “Last year, tax reform suppressed supply,” says Mr Fratepietro. “But now some companies are taking a fresh look at their debt structures and finding that they may benefit from issuing euro debt out of a foreign subsidiary, or hedging additional euro net investments.

“And last year, euro spreads were not as attractive as dollar spreads. But the basis has shifted and it is no longer as costly to issue in euros, which should help supply.”

Refinancing volumes are likely to be somewhat higher in 2019 than in 2018, which should help. Mr Ross thinks that 2019 issuance will be somewhere between the peak of 2017 and the trough of 2018. “In spite of the US tax changes, reasons to issue in euros remain robust,” he says. “And European investors want to buy these names, because they are big and global, the best of the bunch.”

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