Eurobonding

The Eurobond market has been hot for the last three years-and American corporations have been sailing across the Atlantic in [...]

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 Atlantic in greater numbers to get in on the action. Ford, PepsiCo, and Merrill Lynch were part of the American contingent that garnered some of the $53 billion in proceeds from the 420 Eurobond offerings last year, according to Newark, NJ-based Securities Data. Through the first six months of 1996, Eurobond deals attracted $35 billion in 233 offerings. General Electric already this year has tapped the Eurobond market for $4.1 billion$700 million.

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 Europe. But before packing any bags, companies should establish a strategic reason for being there, and recognize that the Eurobond market is not always an easy place to gain access if one has not issued there before.

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 July 11, 2006. Eurobonds weren’t an unusual transaction for the company (it had been financing in Europe for the past 20 years), but the French franc deal was Philip Morris’ first in that currency.

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 London. “Investors liked the story and the name. And for Nationsbank, it offered the opportunity to place paper with new buyers.”

The Eurobond market long has been both receptive and restrictive to U.S. participation. In the past, companies with name recognition, such as Walt Disney, or those with high credit ratings, have always found a willing market in Europe; all others have been shut out. But that has changed.

“After last year, there was a big surge or hunt for yields, and we started looking at ‘A’ and ‘BBB’-rated U.S. corporates,” explains Andrew Pisker, managing director and head of Global Syndicate for Lehman Brothers in London. Subsequently, a two-tiered market has emerged in Europe, the retail market driven primarily out of Switzerland and Luxembourg, which goes for name recognition, and that of institutional investors-such as banks-which are willing to invest in assets with more of a risk rating or with lesser-known corporate names.

Once a company has a track record, it is relatively easy to issue in Europe, observes Storr. “But new issuers would have to do some investor relations work. It’s advantageous to be well-connected with the top banks in the country in whose currency you want to issue bonds.”


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.