US Firms Turn to Europe for Cheap Cash, Spurning US Debt Markets
European Bond Market Sees Surge in US Corporate Debt as Companies Seek Cheaper Financing
The European bond market has witnessed a significant increase in US corporate debt issuance this year, with companies opting to raise funds at lower costs due to favorable interest rates. According to recent data, US companies have sold €116.3 billion ($134 billion) of debt in Europe so far this year, narrowly missing an annual record.
This trend is attributed to the European Central Bank’s active rate-cutting mode amid muted inflation pressures, whereas the US has not 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 uncertain, with job growth slowing sharply over the past three months and the unemployment rate rising.
The shift toward European bond sales is likely to continue as foreign investors may be hesitant to buy US corporate bonds due to tariffs imposed on other countries. Hans Mikkelsen, US credit strategist at Toronto-Dominion Bank’s TD Securities, believes that this trend will lead companies to seek out investors where they are needed more, resulting in a decrease in demand for US corporate bonds and an increase in demand for non-US corporate bonds.
US Corporate Bond Market Faces Pressures Amid Changing Investor Sentiment
The US corporate bond market is facing pressures due to changing investor sentiment. European companies are increasingly shying away from borrowing in dollars, with reverse yankee issuance falling short of Wall Street dealers’ forecasts last month. Dealers had forecast sales of around $100 billion for July, while actual sales were closer to about $81 billion.
This trend can be attributed to the fact that US dollar bond sales fell short due to a combination of factors, including lower demand from investors and reduced supply from issuers. Mikkelsen noted that European companies borrowed less than $2 billion in dollars in July compared with their average borrowing of $13 billion per month over the prior three years.
Impact on Valuations and Technical Factors
The decrease in selling volume and demand is likely to have a positive impact on valuations for US corporate bonds. With spreads at 0.76 percentage point as of Thursday’s close, valuations are at their strongest level of the year. John Servidea, global co-head of investment-grade finance at JPMorgan Chase & Co., believes that the technical factors in the US market will remain positive due to reduced supply and increased demand.
Industry Trends and Developments
The corporate bond market has witnessed several developments this year, including a record-breaking issuance in leveraged loans. However, some companies have struggled to manage their debt maturities, such as UK carpet firm that sought help from US distressed debt funds. Other notable trends include the growth of private credit firms accessing 401(k) retirement funds and Chinese developer Fantasia Holdings Group Co.’s plans to release a new restructuring plan.
Executive Moves and Appointments
The industry has seen several executive moves and appointments, including Oliver Thym’s departure from Thoma Bravo after more than five years as its most senior credit executive. Other notable moves include the recruitment of Alessandro Nuti and Kieran Thind by Oaktree Capital Management to build out its Europe direct lending business.
Conclusion
The European bond market is experiencing a surge in US corporate debt issuance, driven by favorable interest rates and reduced demand for US corporate bonds. This trend is likely to continue as companies seek cheaper financing options, resulting in a decrease in demand for US corporate bonds and an increase in demand for non-US corporate bonds. The impact on valuations and technical factors will be positive due to the reduction in selling volume and increased demand. As the industry continues to evolve, it remains to be seen how these trends will shape the future of the corporate bond market.
