Sunday, July 18, 2010

Europe CFOs Pick Dollar for Bonds as Faith in Euro Wavers: Credit Markets

By Katrina Nicholas and Bryan Keogh - Jul 18, 2010
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Business ExchangeTwitterDeliciousDiggFacebookLinkedInNewsvinePropellerYahoo! BuzzPrint European borrowers are selling more of their bonds in dollars than at any time since the euro’s record low in 2000 as issuers lose faith in the common currency.

Companies in Western Europe sold $162.8 billion of bonds in dollars this year, 24 percent of their total issuance and up from 16 percent in 2009, according to data compiled by Bloomberg. Euro-denominated sales fell to 63 percent from 68 percent, the lowest share since 2007 and below the average of the past decade.

The euro, introduced in 1999 and now shared by 16 nations, lost 10 percent of its value against the dollar this year as concern about the creditworthiness of Europe’s most indebted governments roiled markets. Pacific Investment Management Co., which runs the world’s largest bond fund, is selling European debt, saying the euro is “unlikely” to become world’s most important reserve currency “anytime soon.”

“It’s a good move with what’s going on in Europe to issue in dollars,” said Stephen Mahoney, a money manager at Glenmede Trust Co. in Philadelphia who oversees $4 billion in fixed- income assets. “The euro’s been getting beat up pretty good and the U.S. is a much more liquid market.”

Telefonica SA, Europe’s second-largest telephone company, raised $3.5 billion in the U.S. bond market this year while issuing 1.4 billion euros ($1.8 billion) of debt, Bloomberg data show. The Madrid-based company sold $2.25 billion and 5.75 billion of euros of debt in 2009. Telefonica spokesman Miguel Angel Garzon declined to comment.

Total’s Sales

Total SA, Europe’s biggest oil refiner, sold $2.75 billion of bonds in the U.S. and none in Europe since Jan. 1 compared to $1.3 billion and 3.7 billion euros last year, Bloomberg data show. Michael Crochet-VouRey, a spokesman for the Paris-based company, declined to comment.

Elsewhere in credit markets, the extra yield investors demand to own corporate bonds rather than government debt fell for a second week, reaching the lowest since May. The cost of protecting company debt in the U.S. and Europe from default rose for the week, and spreads on emerging market bonds widened.

Corporate bond spreads narrowed 5 basis points to an average of 187 basis points, or 1.87 percentage points, the lowest since May 20, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. The gap was 142 on April 21 before expanding to as much as 201 on June 11. Yields fell to 3.856 percent from 3.973 percent on July 9.

Credit Swaps

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or speculate on creditworthiness, soared 5 basis points to 113 on July 16, leading to a 2.5 basis-point increase for the week, according to Markit Group Ltd. In London, the Markit iTraxx Europe Index of swaps on 125 companies with investment-grade ratings rose 1.97 basis points for the week to 117.25.

Both indexes typically rise as investor confidence wanes and fall as it improves. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a swap protecting $10 million of bonds and loans.

JPMorgan Chase & Co.’s bonds were the U.S. corporate securities most actively traded by dealers on July 16, with 140 trades of $1 million or more, followed by Goldman Sachs Group Inc. with 113, Bloomberg data show. CIT Group Inc. had the most active junk bonds with 54 trades. High-yield or junk debt is rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s.

Leveraged Loans

The S&P/LSTA US Leveraged Loan 100 Index rose for a second week, climbing 0.55 cent to 88.48 cents on the dollar, the highest since June 29. Loans returned as much as 5.82 percent this year through April 26 before falling to 2.18 percent by July 16, according to the index, which tracks the 100 largest dollar-denominated first-lien leveraged loans.

In emerging markets the extra yield investors demand to own bonds instead of government debt rose 3 basis points to 314 last week, according to JPMorgan index data. The spread has ranged from as low as 229 on April 15 to as high as 359 on May 25.

The euro is the Group of 10 nations’ worst performing currency against the dollar over the past 18 months in its most volatile period since the collapse of Lehman Brothers Holdings Inc. in September 2008.

The common currency weakened to $1.1877 on June 7, the lowest since March 2006, before rallying to $1.2917 as of July 16 as investors gained confidence in governments’ ability to tackle their budget crises.

Investor Pool

Royal Dutch Shell Plc, Europe’s largest oil company, sold $7 billion of bonds in dollars in two separate offerings this year while shunning the euro market, Bloomberg data show. The Hague, Netherlands-based Shell issued $7.5 billion of bonds in the U.S. currency and 8 billion euros last year. Company spokesman Kim Blomley declined to comment.

A deeper pool of investors is attracting some European companies to the U.S. market, which allows them to raise more money, said Timothy Cox, an executive director of debt capital at Mizuho Securities USA in New York, who has been visiting clients in Europe to entice them to sell bonds in dollars.

It’s also cheaper for European companies to sell bonds in dollars and swap the proceeds back to euros than it is to sell euro-denominated debt, according to Morven Jones, Nomura Holdings Inc.’s head of European debt capital markets. The so- called euro basis swap measures the cost of converting dollar interest payments into euros.

Basis Swap

“The basis swap cost of going from a foreign currency into dollars has become hugely expensive,” Jones said in a phone interview. “The reverse is true for those able to borrow dollars in the bond market. For many issuers, issuing dollars and swapping back into euros has generated relatively cheaper euros than issuing euros directly.”

The five-year basis swap is at 29 basis points below the euro interbank offered rate, or Euribor, from 19.3 basis points at the start of the year. The gap was as wide as 40.5 basis points below Euribor on May 7.

In a basis swap a company borrows in one currency and simultaneously lends in another one. Two floating-rate payments are exchanged, each denominated in a different currency and based on a different index.

Supranationals, top AAA rated organizations formed by two or more governments to promote economic development, are also favoring the dollar for their debt sales.


The Asian Development Bank, which aims to reduce poverty in the Asia-Pacific region, issued $5.8 billion of debt in the U.S. this year and none in Europe, Bloomberg data show. The last time the bank sold bonds in euros was in March 2007.

The dollar “has always been the bank’s major funding currency,” Assistant Treasurer Kazuki Fukunaga said in a phone interview from Manila, declining to comment on the euro.

European sales in dollars have been falling since the sovereign debt crisis “took off in full force” in May, driving up relative borrowing costs for even the safest European issuers and eliminating the benefit of the basis swap, said Justin D’Ercole, head of investment-grade syndicate for the Americas at Barclays Capital in New York.

“Even the best names in the best sovereign locations are trading dramatically better in Europe,” he said. “It’s more attractive right now for U.K. banks and European industrials to issue in euros.”

Debt sales in the common European currency slumped 51 percent to 369 billion euros this year compared with the same period of 2009, Bloomberg data show. That’s even as European Central Bank President Jean-Claude Trichet said some investors are being “excessively pessimistic” about the continent.

“With the euro in trouble supranationals are effectively dollarizing,” said Bill Blain, co-head of fixed income at Matrix Corporate Capital LLP in London. “The kind of investors we’re talking about can see past Trichet’s rhetoric and they’re not buying euros.”

To contact the reporters on this story: Katrina Nicholas in Singapore at; Bryan Keogh in London at

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