Sometimes you have to deal with the bad to get to the good. No pain, no gain, as they say. This is currently true in Europe where there is a unique market situation that makes euro issuance especially attractive but at the same time is creating FX pain now and likely later.
Low bond yields in the eurozone are attracting record debt sales by US MNCs, prompting companies to take advantage of lower borrowing costs. The low yields are the result of a QE-style stimulus program in by the European Central Bank and while the effort is supposed to jump-start the economy into better shape, the effort is weakening the euro significantly and causing the dollar to soar. As a result, companies are looking to issue debt in Europe to hedge against the negative FX impacts.
According to the FT, quoting data from Dealogic, US companies have raised €27.2bn in euro bonds in 24 deals, including multibillion-euro offerings from Coca-Cola, Mondelez International, AT&T, and Kinder Morgan.
But despite the seemingly easy pickings when it comes to issuing debt, companies still need to plan. At a recent NeuGroup Treasurers’ Group of Thirty-2 meeting, members were told to hit the road, as in get their road shows up and running. T30-2 meeting sponsor HSBC even mapped out a best-practices template for a European roadshow, involving a trip to London, Frankfurt, Amsterdam and Paris to seal interest in a longer-dated EUR issue, which will likely see strong demand in any case.
And companies shouldn’t wait too long to do so. Interest-rate differentials may look good now, but they could improve even more when the Fed raises rates, and the ECB continues its policy of negative interest rate easing. HSBC’s view is that this is a unique market situation and that there will be a window of about 6-8 months before the market pushes back toward normalization.
While the debt issuance will be a buffer for companies now, in the long run, things could still get tricky. What will hurt (a bit now, maybe more, later), is the impact of the rising US dollar on the value of US MNCs’ cash flows in falling currencies. As painful as it is to look at the translated earnings hit headlines (see Nike, Apple, United Technologies and Pfizer), when hedges roll off, their business lines will face a cliff when hedged budget rates reset. When business lines fall over this cliff will depend on their treasury’s hedge horizon (which almost all wish was far enough out to see FX rates move the other way; not likely).
Fortunately, issuing cheap debt in Europe in a way that also helps match up with assets (including EUR cash flows) can offset some of this pain now and later, too. This is one part of structural changes MNCs should consider to mitigate long-cycle currency and interest rate changes. Businesses should respond, too, rather than just wait to fall off a cliff.