Barclays Capital: Diversifying Debt – Mark Lewellen

When the credit crunch began the debt markets went quiet, but they have since become an invaluable source of alternative debt funding for many corporates. Mark Lewellen of Barclays Capital explains why the recent instability in Europe means more companies are looking to issue debt abroad, not only in US dollars, but also in a whole range of currencies.

Three years after the credit crunch began, companies have continued to look at alternative ways of accessing financing and diversifying away from having a reliance on bank debt. Although the bond markets were effectively closed shortly after the financial crisis began, they quickly re-opened and have since become a vital source of financing. Corporates that would not have previously thought of issuing bonds have been turning to the debt capital markets in greater numbers.

For UK corporates, the obvious choice is to issue bonds in sterling, or even in euros, but with European sovereign markets choppy, to say the least, problems in the Eurozone and bailouts for the likes of Greece, Ireland and Portugal, many have started to look further afield and are now considering issuing debt in foreign markets.

Issuing bonds in countries where a company is not domiciled is not a new development. Yankee bonds, which see non-US corporates issue debt denominated in US dollars, have been around for many years, but more recently they have become a useful tool for an increasing number of corporates, not just the large companies that have sophisticated treasury operations and are more accustomed to issuing debt abroad.

"There has been a spate of European corporates issuing foreign bonds, one driver being the ongoing volatility in the European sovereign market," says Mark Lewellen, managing director of corporate origination for EMEA at Barclays Capital. "'Paralysed' is too strong a word for the European market, but there have certainly been times this year when corporate issuance has been tricky. The US debt market on the other hand has been more stable, and wide open for non-US borrowers.

"The integration of Lehman Brothers' US bond operations with the existing Barclays Capital European platform was quick and seamless, and meant that we were perfectly placed to assist European companies looking to issue cross-border funding," he adds.

"The renminbi market is attractive thanks to its high liquidity, and China is keen to internationalise the currency, using Hong Kong as a hub."

Companies are turning to the US market for many reasons. One important factor is that it is a liquid market, but just as important is the fact that it has suffered little contagion from the European market. It is, therefore, seen as safer and more reliable option, and some companies are issuing debt in US dollars even when the climate in Europe has been relatively benign.

For Lewellen, one noticeable trend is for companies to consider both European and US markets when preparing a debt offering, remaining opportunistic and making the final decision about currencies near the time of issuance to find the most favourable environment.

"We are advising our clients where possible to keep their options open about which market to issue in, so that they can access the US market if conditions are better than Europe at the time, or vice versa," says Lewellen. "European markets are in good shape right now, but it makes sense for European companies to remain flexible."

A guiding hand

Another trend is that the range of deal sizes is becoming much broader. The larger multi-billion benchmark deals are often associated with the financing of major M&A transactions on the scale of sanofi-aventis, or, looking further back, Roche and Novartis. There is, however, an increasing number of mid-cap companies looking at smaller size issuance. An example is United Business Media, which issued a modest sized $350m bond to refinance a bolt-on acquisition. The US private placement market is also extremely active, with companies including Informa, Whitbread, Meggitt and Aggreko taking advantage of the liquidity offered by largely US investors.

"There are many drivers, including liquidity, diversification and, of course, pricing," says Lewellen. "Issuing in US dollars is attractive at the moment from a cost perspective, versus the European markets. Vodafone, BP, Daimler and many others have taken advantage of this arbitrage and accessed the dollar market, even at a time when the European markets have been open. This may of course change going forward."

This growing volume does not, however, signal that US dollar issuance by foreign companies is always straightforward. There are many complications, not least of which is the documentation required. Any public bond issued in the US market involves a comprehensive process that can take a lot of time to complete. Expert guidance from experienced advisors is crucial to getting any corporate foreign bond off the ground. "Documentation is very different in the US from the Eurobond standard. It can be more onerous and time consuming, especially for new borrowers and those without SEC registration. We guide our clients by looking at the rationale for the transaction, providing advice and hand-holding around documentation considerations, helping prepare investor presentations and organising the roadshows to meet potential buyers," says Lewellen.

The same level of expertise is needed for corporate bonds issued in other currencies, which are becoming more popular.

"Corporates that would not have previously thought of issuing bonds have been turning to the debt capital markets in greater numbers."

"Frequent users of the debt markets continue to diversify into alternative currencies. BMW issued in South African rand, AB-Inbev issued in Brazilian real to match its cashflows in that currency. The larger European companies will use euros, dollars and sterling for their core funding, but they will also look at other currencies as needs arise or arbitrage opportunities present themselves. For example we are seeing a lot of investor interest in the Australian dollar market at the moment, reflecting the strength of that currency" remarks Lewellen.

"One currency market that is rapidly developing is the Chinese renminbi. China is looking to develop Hong Kong as an international centre for the offshore market."

Dim sum on the menu

Although foreign issuance is most common in the US dollar Yankee market, the world is familiar with samurai bonds in Japan, matador bonds in Spain and bulldog bonds for foreign companies issuing in the UK. The next exotically named product to start gathering pace is the dim sum bond denominated in Chinese renminbi.

"There is considerable investor interest in the renminbi as a currency, and we expect the market to gain momentum quickly. McDonalds, Caterpillar and Unilever have all issued in the offshore market," notes Lewellen.

The steady shift of the world's economic epicentre towards China is nothing new, and most corporates with multinational operations have some connection with the country's burgeoning economy, whether as a source of raw materials or finished goods, or increasingly as a consumer market. The renminbi market is attractive thanks to its high liquidity, and China is keen to internationalise the currency, using Hong Kong as a hub. Unilever is the first European multinational to launch a dim sum bond, raising RMB300m ($46m), from institutional investors in Hong Kong. Like other organisations entering this market it has operations in China that are expanding, and the bond issuance is, among other things, a sign of the company's commitment to the Chinese market. Many other companies could be tempted to show a similar commitment in the coming years, so the renminbi market for foreign bonds is likely to grow steadily.

So, whether it is in US dollars, Chinese renminbi or Swiss francs, the appetite for foreign corporate bond issuance is growing for a number of reasons. As this activity gains pace, however, it is important to keep an eye on the complexities of regulation and documentation, and calling on an expert intermediary, one with knowledge of global markets and the experience to make a deal work, could be the deciding factor in successfully accessing the world's reawakening debt markets.