October 1 1996 by Steve Bergsman
The Eurobond market has been hot for the last three years-and American corporations have been sailing across the
The cost of capital is always a primary concern for any corporation, and the vicarious attraction of Eurobonds has been the more attractive spreads. This, combined with the reduced expense to raise funds-no registration fee to the Securities and Exchange Commission has many companies heading off to
In July, Philip Morris Capital Corp., the investment and financing subsidiary of the New York-based cigarette company, issued 1 billion French francs of 6.875 percent Eurobonds due
Eurobond deals can be in most any currency, including dollars, but the attraction for Philip Morris in Europe are deals in European currencies because they allow the company to hedge exposure on its assets in foreign currencies, explains Hans Storr, chairman and chief executive of Philip Morris Capital and chief financial officer of the Philip Morris Cos.
If a company has assets in foreign currencies resulting from investments or business success over the years, “it might be to the company’s advantage to hedge some of that exposure,” says Storr.
Philip Morris eventually swapped the proceeds of its offering into Swiss francs where the coupon was about 2.5 percentage points lower than with the French franc issue. “In other words, there is arbitrage between the two currencies, and it is reflected in the long-term interest rate,” Storr says.
While Philip Morris’ last Eurobond issue was structured to deal with a specific financial issue, Nationsbank entered the Eurobond market for the first time last year because of two strategic needs: It wanted to diversify its source of funds and meet funding needs that originated from its non-bank finance businesses.
The Charlotte, NC-based bank entered the Eurobond market last year, raising $500 million. It came back again this year with a $500 million floating rate note due June 17, 2002; a discount rate of 99.80; and a coupon 15 basis points above the three-month London Interbank Offered Rate. The company will borrow, on an unsecured basis this year, about $4 billion (the same as last year), says John Mack, Nationsbank treasurer.
Although new to the market, Nationsbank was able to do well immediately because of extensive field preparation.
“They did a lot of work going around and doing road show presentations to European investors last year,” says David Tory, a managing director and head of European Syndicate for Merrill Lynch in
The Eurobond market long has been both receptive and restrictive to
“After last year, there was a big surge or hunt for yields, and we started looking at ‘A’ and ‘BBB’-rated
Once a company has a track record, it is relatively easy to issue in
Steve Bergsman is a Mesa, AZ-based freelance business writer who has written about corporate finance for Reuters, Barron’s, Global Finance, and Corporate Finance.