Two mammoths of the corporate world, Apple and Shell, stepped on to a crowded bandwagon yesterday when they decided to tap the Eurozone’s bond market to raise billions of euros.
More than €53bn (£39bn) have been raised using bonds – interest-paying IOUs – by US companies so far this year, according to figures from Dealogic.
The figure is more than double the amount that had been raised by this time last year. In fact, it is even more than the sum of all the cash raised from bonds over the year-to-date for the past four years combined.
The UK’s major companies have also been at it. They have sapped Eurozone bond markets for €24bn this year – similar to last year, but nearly triple 2013’s figure.
There are many reasons why a company would want to borrow money in a foreign currency. The Eurozone sucks in nearly half of all goods and services that are exported by Britain.
If the exchange rate between the pound and the euro moves sharply – as has happened over the past year – companies can find the euros they get from sales are worth less when converted to sterling.
If salaries, share dividends and bond repayments are paid in sterling, then a lower euro eats into profit margins. But, if instead, the money you owe is in euros, you are safe.
Companies can use borrowing in a foreign currency to hedge against losses in their foreign operations. It protects British and American firms if the euro falls further.
“People have been increasingly frustrated by the dramatic moves [in the exchange rate],” Richard de Meo, founder of Foenix Partners, which helps firms to deal in foreign currencies, told City A.M.
“A lot of people are trying to neutralise currency risk and this is probably one of those steps.”
With the next move for official interest rates in the US and UK likely to be upwards, and with speculation growing over whether the Eurozone will expand its stimulus measures, the euro could get even weaker down the line.
Yet this is not the only reason for borrowing in euros. The different directions of monetary policy also impact on relative borrowing costs.
The Eurozone’s stimulus programme, quantitative easing (QE), uses freshly printed money to buy government bonds. Once it enters financial markets, that money can then go into corporate bonds, making it cheaper for companies to raise money.
“We saw that in the UK. When QE kicked off here there was a massive move by companies to issue longer dated debt instead of bank borrowing,” David Owen, chief European financial economist at Jefferies, an investment bank, told City A.M.
“In an environment where the US is going to be raising rates, and the Bank of England will at some point raise rates, the Eurozone does stand out [as a source of finance].”
That means there is double bubble for firms borrowing in euros. Not only can they benefit from lower interest rates, they also stand to gain if the euro weakens.
There is always a chance companies are not making calculated decisions, but are just jumping on the bandwagon.
“With all these things there’s also the herd mentality – as soon as a couple of them do it, the others join in because if it doesn’t work out they can always turn around and say well, everyone else was doing it,” Owen said.