Can reverse Yankees find forward gear again?

The volume of euro bond issuance from US companies fell sharply in 2018 compared to recent years. The finger of blame was quickly pointed at Trump’s tax changes, but there were other forces at play. Can the barriers be lifted in time for a better 2019? Nigel Owen reports.

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From 2015 to 2017, more than €218bn of corporate bonds were issued into the euro market by US issuers. So-called Reverse Yankee issuance made up more than 20% of euro corporate bonds in those three years, but in 2018 significantly fewer issuers made the journey east across the Atlantic ocean and total issuance by such issuers was down 50% on 2017. Some commentators suggested this may have been the start of a trend fuelled by US tax reforms, but the success of a handful of Reverse Yankee deals late in the year supports the argument it is more likely to be a dip.

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“We are still seeing a strong demand for Reverse Yankees,” says Matteo Benedetto, executive director in Morgan Stanley’s European fixed income capital markets syndicate team. “Investors have the budgets for Reverse Yankees, so there is still appetite.

“2018 has been slower for two main reasons. Firstly, as a consequence of the tax changes in the US in the second part of 2017, many global corporates, which would have been the main candidates for Reverse Yankees, spent a lot of time in Q1 evaluating the changes in regulation and how this would impact planning for 2018 and 2019.

“They had to restructure internal and external funding and consider the new regulation with regards to foreign subsidiary funding and repatriation of cash. Then in Q2, the European market experienced limited periods of favourable market conditions and more volatility than we have seen in previous years. This provoked some caution with many monitoring the market for a number of weeks and so issuance was delayed further.”

This was highlighted by the combined near €5bn raised in November by medical technology company Stryker and pharmaceuticals company Allergan. In total, €17.5bn was issued by American issuers in the euro market in September, October and November. This was close to 50% of 2018’s total Reverse Yankee issuance, which bodes well for 2019 as the euro market has to contend with the end of quantitative easing. 

In a perverse twist, the end of the ECB’s quantitative easing programme that was partly responsible for the boom in Reverse Yankee issuance may prove to be a catalyst to its recovery in 2019. Investors see that there is more downside to bonds eligible for the ECB’s corporate securities purchase programme (CSPP), the part of the QE programme designated for buying corporate bonds, than there are for those not eligible.

One of the main criteria for bonds to be eligible for the CSPP was for the issuer to be based in the euro area. This meant that bonds from US issuers were not eligible and so did not benefit from their spreads tightening as much as eligible bonds. The launch of the ECB’s quantitative easing programme in 2015, which pushed yields to all-time lows, proved to be a stimulus for US issuers heading to Europe for their funding. In 2015 reverse Yankees were responsible for 21.7% of all euro corporate issuance.

However, once the ECB stops buying, spreads are expected to widen again, with those that tightened less expected to widen less, making bonds from US issuers more favourable for investors. This will be welcome news for US issuers that have euro bonds redeeming in the coming years.

“In 2019, the volume of euro bonds issued by US corporates that are redeeming is much bigger than in 2018, so that should push Reverse Yankee issuance back up towards 20% of the market,” says a London-based syndicate manager at a US bank.

In 2018 €15.8bn of Reverse Yankee bonds redeemed. In 2019 the redemption volume is €31bn and it grows again to €35bn in 2020.

“Proctor & Gamble, Allergan and Stryker all went well so that should spur on the appetite for issuers to come back to euros,” he adds. “There will also be other US borrowers looking at the euro market for the first time.”

Benedetto agrees and expects a combination of regular issuers with established platforms and new entrants to consider Reverse Yankee issuance in the euro market in 2019. He feels the differentiator for success, however, is more likely to be the level of an issuer’s ambition in the competition for investors’ attention.

“In a market that is selective and volatile, if you have an event-driven or larger funding plan, the offerings are likely to be more successful than a standalone single tranche bond,” he explains. “New entrants should be mindful that competition for funding could be fierce going into 2019. Larger or M&A-driven issuance will always find a way, but smaller opportunistic issuance may need to compromise on pricing to find space in the euro market."