Jumbo Europe Borrowers Add Pound Bonds on Brexit Cost Drop

LAGOS (Capital Markets in Africa) – More jumbo bond sellers in Europe may include sterling tranches as a Brexit-fueled decline in borrowing costs bolsters the appeal of a diversified investor base.

Siemens AG is marketing a benchmark five-year pound bond on Tuesday, together with a four-part euro benchmark offering. LVMH Moet Hennessy Louis Vuitton SE and Comcast Corp. also sold pound notes alongside euro tranches last week, following a decline in sterling bond yields caused by expectations for an interest-rate cut. On a currency-hedged basis, selling pound bonds and converting the funds into euros now costs about the same as issuing euro notes, according to Jorgen Kjaersgaard, a portfolio manager at AllianceBernstein in London.

For instance, LVMH’s 850 million-pound ($1.1 billion) seven-year note priced at a spread of 75 basis points over U.K. government bonds. Swapped into euros through cross-currency basis, this equates to around 10 basis points cheaper than the company priced nearby maturity euro tranches, according to Bloomberg calculations.

“As long as the euro and the sterling are trading at close levels, we will continue to see jumbo deals with both currencies,” Kjaersgaard said. The “very strong” demand in the euro credit market has also overflowed into the sterling market, he said.

High-grade sterling corporate bond yields have dropped 28 basis points this year to 1.84% — about double the decline in the euro market — amid speculation that the Bank of England will take action to support the economy through post-Brexit uncertainty. Last month’s decision to hold rates has done little to damp expectations, with yields remaining near record lows and rates traders still pricing in an almost 100% chance of a cut this year.

LVMH included two sterling bonds in its seven-tranche deal because of “interesting” arbitrage opportunities and the chance to diversify its funding base, Clementine Tassin, its chief financing and treasury officer, said in an interview last week. The company sold the equivalent of 9.3 billion euros ($10.1 billion) of bonds to help pay for the acquisition of Tiffany & Co.

Media giant Comcast issued euro and pound bonds to refinance debt. It only sold dollar bonds in 2018 when it had a massive $27 billion 12-part deal for the purchase of European broadcaster Sky.

Cross-currency swap moves could dim some of the appeal of the sterling market to euro borrowers. The five-year sterling-euro cross-currency basis swap has tumbled in 2020, hitting the lowest in five years, which works against companies looking to issue pound bonds and convert the funds back into euros.

Still, this currency shift has been offset by the lower sterling yields, as well as the opportunity to target more investors than just euro bond buyers.

Mixed-currency deals broaden a borrower’s investor base and greater recognition may lead to “better cost of capital” especially for future deals, said Fraser Lundie, head of credit, international, at Federated Hermes Inc. Investors also gain as it “increases the number of potential ways of accessing the company,” he said.

Source: Bloomberg Business News