Collapsing cost of euro funding opens up new window for US firms

Euro banknotes of various denominations are arranged for a photograph in London. The euro is on course for its biggest annual fall against the dollar since the year of its launch in 1999, while the gap between eurozone and US bond yields is its widest in years. ReutersLondonThe euro’s slide against the dollar this year has been a competitive boon for corporate Europe, but it has also opened up an alternative financing window for corporate America. This will be a record year for US companies raising funds in euros, a financing option that should be widely used again next year if the euro weakens further against the dollar, as most analysts expect, and interest rate differentials remain wide. US non-financial firms have already raised a record €69.8bn ($73.8bn), up sharply on the previous record of €41.7bn last year, according to Thomson Reuters data up to November 24. That marks a rise to 25% of total issuance, also a record, from 15%. The number of deals stands at 68, well up from 50 last year and within sight of the record 73 set in 2000. This surge has been prompted by the sharp fall in the euro and euro funding costs this year which has made it more attractive than ever for US firms with a global presence to raise cash on the other side of the Atlantic. The euro is on course for its biggest annual fall against the dollar since the year of its launch in 1999, while the gap between eurozone and US bond yields is its widest in years. For companies, the euro’s “cross-currency basis swap” rate -the cost of swapping euros into dollars without the exchange rate risk - has been central to their renewed appetite for euro funding. This week the three-month basis swap showed the highest premium for dollars since mid-2012. Earlier this month longer-dated bases that corporates use more, such as 5- or 7-year rates, hit their highest in almost four years. This has made US firms think twice about swapping the euros back. Instead many opt to keep them for other purposes such funding business operations in Europe or hedging their European exposure. “It’s an integral part of how US companies view their funding now,” said Rupert Lewis, head of European Syndicate at BNP Paribas in London. “Most of them are huge global companies.” Activity has slowed for the US Thanksgiving holiday and as the Christmas holidays approach. But Mastercard raised €1.65bn this week, and earlier this month UPS raised 1bn and Priceline 750mn. The benchmark three-month euro/dollar cross-currency basis swap rate - the premium an investor demands to swap euro-interest rate exposure into dollar-denominated exposure - hit -56 basis points this week, a level not seen since the summer of 2012. Much of this year’s issuance came in the first quarter, when the euro plunged 15% and the 10-year German bond yield sank to just 0.05%. While the euro and borrowing costs are now sliding again - two-year German yields are a record low -0.4% - the scale and speed of the move hasn’t been as great. So there’s been less of a sudden urge to take advantage of pricing anomalies. And because the cost of swapping euros back into dollars is now nearly double what it was earlier in the year, US firms issuing in euros may be more tempted to keep the cash in euros. Brendon Moran, Global Co-Head, Corporate Origination Debt Capital Markets at Societe Generale in London, notes that while the nominal value of deals this year will smash records, the number of deals hasn’t exploded. “Whether we see a repeat in the surge in volumes we saw this year will be driven more by pricing arbitrage, which may or may not be there. I doubt we’ll see a material change,” he said.