Asian issuers including the government of South Korea and India’s Bharti Airtel launched €4.2bn of euro bonds in the first six months, according to Thomson Reuters data. That tally beat 2013’s first-half record by 6% as more issuers took advantage of record-low European policy rates to beat their US dollar funding costs.
In recent weeks, however, the equation has become more complicated as cross-currency swaps have made it more expensive to convert funds raised in euros back into US dollars. That makes a euro bond a less attractive option for issuers that have no natural need for the single currency, although some still see benefits in diversification.
Korea National Oil Corp ditched plans for a euro issue and opted to sell bonds in US dollars last week, despite roadshowing exclusively in Europe. By contrast, another oil and gas company, India’s ONGC Videsh, was set to launch a seven-year euro tranche on Monday at 180bp–185bp over mid-swaps.
On the sovereign side, Republic of Indonesia issued a €1bn bond last week, and the Republic of Philippines is currently meeting investors in Europe.
“Asian borrowers go to Europe for various reasons. The two main reasons are diversification and cheaper funding,” said a Singapore-based trader.
Various motives
A euro bond may offer more than just a cost saving, however. For ONGC Videsh, a seven-year euro offering would help the company balance its maturity profile, as well as give it a more diverse investor base. Costs may not be the main concern, a source from the company said.
However, for price-sensitive Korean corporations, a few basis points could justify a complete change of plan.
KNOC, unable to resist competitive funding levels in US dollars, scratched plans to sell a euro-denominated bond and returned to the US market.
The state-owned issuer, rated A1/A+/AA-, re-opened a US$500m 2.75% January 2019 offering with a US$250m tap and sold a US$550m 10-year bond on Thursday night.
The tap priced to yield 65bp over US Treasuries, while the 10-year priced to yield 77.5bp over. Both results were inside KNOC’s outstanding curve.
KNOC’s roadshow kicked off on June 16 and had included meetings only in Europe. Bankers quickly found, however, that there was more investor demand for US dollars – not euros.
“This shows that the US market is the best funding source,” said a banker on the deal. “The euro levels may have been only 5bp–10bp over what we achieved in US dollars, but demand for a dollar bond was much stronger.”
The issuer’s plans for a euro deal coincided with a deteriorating euro-dollar cross-currency swap, the cost of converting between Euribor and US dollar Libor and a key part of the equation for an overseas borrower.
Plans on hold
The five-year swap was quoted at -9bp on Monday according to Thomson Reuters Eikon data versus -1bp in April, the narrowest differential since early 2008. A more negative reading means borrowers will face a higher interest rate after swapping into dollars.
“A lot of investors are betting on a stronger US economy so they want more exposure in US dollars on expectations that it will strengthen,” said another banker on the deal.
Other Korean borrowers including Export-Import Bank of Korea and Korea Development Bank have postponed plans to issue euro-denominated bonds because of the deteriorating swap levels, according to a banker familiar with the talks, adding that these issuers may look to the US dollar market first and wait for euro swaps to recover.
“We’ve asked investors if they’d still buy Korean credits even though they’re so tight and there’s a possibility we might see a lot of supply in the second half,” said a banker on the deal. “The answer was, ‘There aren’t many more options away from Korea, and we can’t keep buying that much from China.’”
Should they decide that diversification is worth paying a relatively small premium over US dollar funding costs, Asia’s full-year record for euro bonds could quickly fall.
Following last week’s €1bn offering from Indonesia, Asian issuers outside Japan and Australasia have sold €5.2bn of bonds in euros so far this year, according to Thomson Reuters data.
The full-year record, set in 2013, stands at €7.1bn.
