(Bloomberg) — Companies are increasingly looking to Europe to raise money cheaply, a shift that is turning out to be a near-term positive for US corporate debt.
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Verizon Communications Inc. this week sold €2 billion ($2.31 billion) of debt, its first deal in the European market since early 2024. Earlier in July, FedEx Corp. and PepsiCo Inc. both sold debt in the common currency, their first offerings there since 2021.
US companies have sold €116.3 billion ($134 billion) of debt in Europe this year, known as reverse yankee issuance, just €4.4 billion shy of an annual record with about five months left in the year. Some corporations, like FedEx and PepsiCo, are just refinancing euro debt that’s maturing, but the aggregate figure is higher with good reason: the European Central Bank is in active rate cutting mode amid muted inflation pressures, while the US hasn’t cut rates since December.
“From an issuer’s point of view, it’s less expensive to borrow in euros,” said Gordon Shannon, a portfolio manager at TwentyFour Asset Management.
The outlook for US rates in the coming months is getting hazier. A report on Friday said job growth slowed sharply over the past three months and the unemployment rate rose, signaling the labor market is shifting into a lower gear and giving the Federal Reserve more leeway to cut rates.
US Treasury yields dropped, but to levels seen in early July. Even with Friday’s market moves, borrowing in Europe remains cheaper. For borrowers that hedge, that dynamic may change in the coming days.
Even so, over time the shift is probably toward more company bond sales in Europe, according to Hans Mikkelsen, US credit strategist at Toronto-Dominion Bank’s TD Securities. As the US continues to impose more tariffs on other countries, including fresh levies announced on Thursday, foreign investors may have a “natural tendency” to buy less US corporate bonds in favor of Euro-denominated corporate debt, Mikkelsen said in an interview. That decrease in demand will lead companies to seek out investors where they are.
“It’s a bit of a long-term structural development where you’ll see more US companies ease into those other markets,” Mikkelsen said in an interview. “There will be less demand for US corporate bonds and more demand for non-US corporate bonds. US companies will have the same issuance needs. So they have to realize that they have to fund themselves more in other currencies.”
In addition to US companies looking to borrow in euros, European companies are increasingly shying away from borrowing in dollars. In July, reverse yankee issuance was about $9 billion, compared with $3 billion on average for the month over the prior three years, according to Mikkelsen. European companies, on the other hand, borrowed a little more than $2 billion in dollars in July, compared with $13 billion a month on average for the prior three years.
Those shifts toward European issuance go a long way toward explaining why US dollar bond sales fell short of Wall Street dealers’ forecasts last month, Mikkelsen wrote. Dealers had forecast sales of around $100 billion for July, while actual sales were closer to about $81 billion, according to data compiled by Bloomberg News.
In the near term, anything that reduces selling volume, known as a technical factor, could help keep spreads on US high-grade corporate bonds relatively tight. At the same time, demand, also a technical factor, remains strong globally, with cash gushing into credit funds. US company debt faces a series of pressures now, but valuations for much of the past week were at their strongest level of the year, with spreads at just 0.76 percentage point as of Thursday’s close.
“If you take this overarching trend of net supply being down, banks issuing less because of regulatory reform expectations as was the case this past quarter and more US companies are issuing in Europe, all that does is further reinforce the positive technicals in the US market,” according to John Servidea, global co-head of investment-grade finance at JPMorgan Chase & Co.
Week In Review
US leveraged-loan issuance reached a fresh record in July, as junk-rated borrowers flocked to the market largely to reprice debt, saving companies millions in interest expenses.
Deutsche Bank has seen its league table rankings drop in leveraged finance, to no. 8 from no. 1 in 2014. The bank has gotten tangled up in a series of difficult deals, and has faced internal and regulatory pressure to shrink the business, according to people familiar with the matter.
Centerbridge Partners joined the ranks of many alternatives managers that see accessing 401(k) retirement funds as a logical next step for private credit firms. But while many are welcoming a future where 401(k) retirement vehicles have access to private investments, Sixth Street Partners’ Co-Chief Investment Officer Josh Easterly is urging caution.
Chinese developer Fantasia Holdings Group Co. plans to release a new restructuring plan in the coming weeks after previous attempts fizzled, underscoring the years-long struggle of builders to move past an unprecedented property crisis.
In the US investment-grade bond market, Lazard Inc. sold $300 million of notes to refinance debt maturing in 2027, while Sherwin-Williams Co. sold $1.5 billion in three tranches.
In Europe, UK utility Southern Water Ltd. sold the biggest sterling corporate bond in nearly 18 months as it seeks to shore up its finances, while General Motors Financial Co Inc. and Severn Trent sold impromptu euro debt offerings.
Harley-Davidson Inc. said it plans to sell a nearly 10% stake in its finance unit along with more than $5 billion of retail loans to KKR & Co. and Pacific Investment Management Co. Bloomberg had previously reported that the firms were in advanced talks.
Wall Street has a familiar gripe about the bots that now handle a growing share of trading in the corporate bond market: they are there to buy and sell your bonds, right up until you really need them. In periods of severe market stress, these computer-driven programs have historically struggled to keep up, forcing traders to turn them off. But in April, the algos showed signs of learning to stay online even when volatility spikes.
A UK carpet firm that once supplied the British royal family has been scrambling for months to manage its looming debt maturities. It found a solution in an unlikely place: US distressed debt funds.
EchoStar Corp., the broadband company that’s missed debt payments, is being pushed by federal regulators to sell some of its airwaves to address concerns it has failed to put valuable slices of wireless spectrum to use.
Legal software provider Dye & Durham Ltd. launched a review of strategic options, including a potential sale, in a bid to maximize shareholder value after reaching a truce with one of its largest investors.
On the Move
Oliver Thym, a partner at Thoma Bravo, is leaving the firm after more than five years as its most senior credit executive. Thym, who oversaw Thoma Bravo’s credit funds and strategic debt investments, will transition out of his role by the end of this year as the firm adds Jeff Levin and Kunal Soni who previously worked at Morgan Stanley.
Oaktree Capital Management hired two executives from Bain Capital and Intermediate Capital Group as it builds out its Europe direct lending business. Alessandro Nuti, who worked at Bain for over seven years, is joining as a managing director, while Kieran Thind is joining from Intermediate Capital as a senior vice president.
CoBank recruited Aimee Evans as syndicate head of sales, capital markets. Evans previously worked at BMO Capital Markets as a managing director, and spent about a decade at Bank of the West before it was acquired by BMO.
Sumitomo Mitsui Banking Corp.’s head of loan origination for East Asia, Hong Kong-based Wami Ha, is retiring after more than 30 years working in the banking sector.
Separately, SMBC appointed former Morgan Stanley managing director Joy Kwek as head of capital markets and solutions for Asia Pacific — a newly created role based in Singapore.
–With assistance from Tasos Vossos.
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