The stark divergence between U.S. and eurozone monetary policy has made it more attractive than ever for U.S. companies to raise cash in euros and swap it back into dollars this year, but that window of opportunity could be closing.
The euro/dollar cross currency basis swap, effectively the cost of swapping one currency into the other without the exchange rate risk, recently showed the highest premium for dollars in more than two years.
This could deter U.S. firms from raising funds in euros and swapping them back into dollars, although the cost of raising dollar funds outright on the wider capital markets is even more prohibitive thanks to the widening gap between official U.S. and eurozone borrowing rates.
As long as it's cheaper for U.S. firms to access dollar funds via the cross-currency basis markets, it will remain an attractive option, even if the rush to do so seen at the start of the year slows down.
"Valuation will make corporate issuance quite opportunistic as long as the cost of doing so is cheaper than credit spreads," said Fabio Bassi, head of European interest rate derivatives strategy at JP Morgan in London.
Several U.S. multinationals have come across the Atlantic to raise billions of dollars in recent weeks, including Coca-Cola, AT&T and Mondelez.
There's no clear-cut measure of how much it costs U.S. firms to raise funds in euro capital markets. That's determined by each firm's creditworthiness, risk perception in the eyes of investors and specific terms of the fund-raising in question.
U.S. firms have raised the most funds in euros year-to-date since the pre-crisis calm of 2007, even though the cost of swapping those euros back into dollars has risen to its highest in over two years.
They have issued 35.2 billion euros of bonds so far this year, according to Thomson Reuters data. That's as much as the previous six years' comparable totals combined, the highest since 2007 and the second highest since 2000.
They're on track to raise a record amount this year of between 75 and 90 billion euros, according to Bank of America Merrill Lynch recent estimates. Potentially, that would be nearly double last year's total of 51 billion euros.
These numbers show that proportionally, the share of U.S. investment grade debt issuance in euros this year will virtually double to as much as 30 percent of all issuance.
WIDER US-EUROZONE SPREADS
Issuance tends to be greater in the first quarter anyway as companies budget and plan for the year ahead. A plentiful supply of global liquidity and a maturing eurozone market have also helped.
Not all of those euros will be swapped back into dollars, however. Some will be used to fund eurozone-based investment and spending, or for currency hedging purposes.
But the cost of doing just that on the cross-currency basis swap markets may still be relatively attractive. The benchmark three-month euro/dollar cross-currency basis swap rate hit -30 basis points recently, a level not seen since late 2012.
That negative number implies the premium an investor demands to swap his euro-interest rate exposure into dollar-denominated rate exposure. JP Morgan reckon the "break-even" level is around -38 basis points, although it could feasibly move out to as much as -50 basis points.
On Wednesday it had eased back to around -25 basis points.
Compare that to the spread of relative U.S. and eurozone government bond yields, as the European Central Bank launches its trillion-euro bond buying program to tackle deflation and revive growth just as the Federal Reserve prepares the ground for its first interest rate since June 2006.
The six-month U.S. yield is 16 basis points and the eurozone equivalent is -21 basis points, giving a spread of 37 basis points.
The gap widens the further out the curve you go. The two-year U.S. yield is 0.67 percent and the eurozone equivalent is -0.21 percent, giving a spread of 88 basis points. The spread between equivalent 30-year yields recently hit 200 basis points, the widest on record.
"The pace of issuance is unlikely to continue, despite the busy pipeline," said James Cunniffe, on the bond syndicate desk at HSBC in London.
"But the rates are clearly attractive," he said.
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