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US companies are flocking to Europe’s bond markets as an uptick in cross-border mergers and acquisitions and a rethink on the path of interest rates draw issuers towards lower borrowing costs on the continent.
A rally in European debt markets has enticed US companies to borrow about €30bn in so-called reverse Yankee deals — in which US companies raise money in the euro-denominated bond market — this year, according to Bank of America data. Johnson & Johnson and Booking Holdings are among the companies pursuing multibillion-euro deals.
If this rate of issuance persists, supply of such bonds could reach about €85bn, close to the record of €88bn reached in 2019, according to the BofA data.
“People are looking at a credit market that remains exceptionally strong and they want to take advantage of the opportunity that presents itself,” said Helene Jolly, head of investment grade corporate syndicate for Europe at Deutsche Bank, one of the bookrunners for Johnson & Johnson’s euro bond deal.
The surge in euro issuance has come as the gap between European and US corporate borrowing costs widens, driven by investors — optimistic that Eurozone inflation is heading back towards target — betting that the European Central Bank will begin to lower interest rates ahead of the Federal Reserve.
Yields on euro-denominated corporate debt maturing in seven to 10 years are nearly 2 percentage points lower than their US counterparts, according to BofA data. Since the start of the Covid pandemic, that gap has averaged 1.5 percentage points.
Large US companies with sales in a range of currencies sometimes raise money in Europe rather than the US as a way of diversifying their sources of funding. Such reverse Yankee issuance — named in contrast to “Yankee” bonds sold by foreign borrowers in US markets — becomes more attractive when the gap in yields widens.
“Monetary policy divergence is again at play . . . we think this is a large motivator to the resurgence in reverse Yankee supply this year,” wrote Barnaby Martin, a credit strategist at BofA.
Johnson & Johnson opted to tap European markets to raise €2.5bn across three maturities this week in order to fund part of its $13.1bn acquisition of medical device maker Shockwave. The company also raised $4bn from a dollar bond to help pay for the deal.
“We are seeing a pick-up in M&A financing activity,” said Jolly. “Some of it is driven by the [interest] rate divergence between the dollar market and the euro market, and some of it is broad investor diversification.”
A flurry of longer-dated reverse Yankee deals, which peaked in 2019 before the pandemic, has also created a looming wall of debt that now needs refinancing, prompting US issuers to return to the euro market.
US drugmaker Merck on Wednesday issued a four tranche €3.4bn bond that will go towards funding a $1.3bn US acquisition as well as paying off looming debt maturities.
Ohio-based glass manufacturer Owens-Illinois on Thursday issued a €500mn five-year bond to finance the purchase of some of its outstanding debt due in 2025. Reverse Yankee deals by companies with subinvestment grade credit ratings — like Owens-Illinois, have historically been less common than investment grade issuance but are now also on the rise.
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