* Unfavourable shifts in euro spreads, currency swaps
* Trump tax changes to chill bond issuance
* Over 54bn raised by IG US issuers in 2016
By Laura Benitez
LONDON, Dec 9 (IFR) - US companies will pull back from the European bond market in 2017 after two years of blockbuster issuance as euro technicals swing out of favour and proposed tax changes chill the appeal of selling debt.
Although US corporates are still expected to use the European capital markets next year, bankers estimate a material decline in volumes.
A drop in reverse Yankee issuance would be a blow to the European market, which has thrived on jumbo-sized transatlantic deals over the last few years.
“US credit spreads have been outperforming euro spreads due to Treasuries and the Trump effect, and there’s no sign of the cross-currency basis swap recovering in the near term,” said Marco Baldini, head of European bond syndicate at Barclays.
“I would be extremely surprised if US companies continued to issue as much in euros as they have over the last two years,” Baldini said.
Treasury yields have surged in the aftermath of Donald Trump’s surprise presidential victory, meaning investors are happy to accept lower credit spreads since they are still receiving the same overall yield.
US names have flooded the European market to cash in on ultra-low rates, compounded by the launch of the ECB’s corporate bond purchase programme in June, which sent demand for paper soaring.
“Some 26% of euro investment-grade corporate supply so far this year has come from US issuers, while 22 of the 39 debuts in the market have been cross-border,” said Jeff Tannenbaum, head of EMEA debt capital markets at Bank of America Merrill Lynch.
US companies have issued over 54bn of euro-denominated investment-grade bonds this year so far, from a total 278bn printed in the sector, according to IFR data.
Known for their pragmatic approach to pricing, US companies have helped bolster momentum during periods of volatility, when European companies tend to stay cautious and more price sensitive.
US issuers have accepted larger new issue concessions this year and focused instead on the attractive all-in yields.
However, the generous premiums paid have set the bar high for other prospective borrowers.
US medical equipment firm Zimmer Biomet, for instance, not only had to pay eye-watering premiums to sell a 1bn bond this week, but also had to add protection via a 25bp coupon step-up for the first time on its debt to keep investors happy.
“There will be other US companies scratching their heads at some of the recent precedents and asking why they should do the same, especially when the US dollar market remains in such great shape,” Baldini said.
In a further blow to reverse Yankee prospects, president-elect Trump said he plans to allow US firms to repatriate funds held overseas with only a 10% tax rate, versus the current 35%.
This would lure cash back home and give US borrowers less incentive to sell debt, even in their own currencies.
“We’ll certainly see a drag on issuance next year in conjunction with the potential repatriation tax cuts, but I don’t expect this to fully play out for a while yet, although by the first half of the year we could see some notable declines in reverse Yankee issuance from companies starting to think about these policies,” said Alex Hayes-Griffin, head of cross-border, EMEA DCM and syndicate at Citi.
While plenty of US companies have European operations to fund, bankers say even their natural need for the currency may wane.
Non-European issuers have finite net investment hedge capacity to drive natural euro funding needs, and bankers say many could have already exhausted their euro needs.
“Although not everyone has hit that limit, a number of borrowers already have. But saying that, there are still many companies that have European operations and who will continue issuing in euros as the most straightforward route to matching their balance sheets and revenue streams in the single currency,” Hayes-Griffin said. (Reporting By Laura Benitez, additional reporting by Tom Porter, edited by Julian Baker and Sudip Roy.)