Yankee issuers succumb to lure of dollar market

By Helene Durand and Natalie Harrison

LONDON/NEW YORK, March 13 (IFR) - A wave of Yankee issuancecrashed on to the shores of the US market this week as anattractive cross-currency basis swap and increased demand frominvestors for higher yielding debt lured foreign borrowers backto the market.

Abbey, Barclays, ING, Lloyds and Credit Agricole raised overUS$10bn during the week, easily beating the US$7.2bn of Yankeeissuance from European banks in the whole of January andFebruary.

"We have seen a switch in the last three weeks and the USmarket is starting to offer more favourable pricing in certainmaturities. We are finally getting busier after a quiet start,"said Tom Criqui, head of FIG syndicate at Deutsche Bank in NewYork.

"The move in the basis and tighter spreads mean that the USdollar market offers more aggressive execution in three- andfive-years. Issuers have saved between 10bp and 15bp on averagerecently."

The swap between euros and US dollars hit minus 40bp andminus 39bp in five- and three-years respectively this week. Anegative number benefits companies that borrow in dollars andswap funds back to the single currency.

"The arbitrage for European banks is extremely attractive.Abbey's US dollar trade this week, for example, was around 30bptighter on a swapped basis than where it would have funded ineuros," said Alexandra MacMahon, head of EMEA FIG DCM atCitigroup.

The UK lender priced a US$1bn five-year on books ofUS$2.3bn. Credit Agricole, meanwhile, saved around 33bp versuseuros when it issued a US$1.5bn 10-year bullet Tier 2 bond thisweek - the first Tier 2 trade of the year from a Yankeeborrower.

TURNING TIDE

Market participants had predicted in late February that thetide could finally be turning and that non-US issuers would bereturning to the US dollar market in droves.

As well as attractive funding costs, a combination of eagerinvestors and tighter spreads have given the market a shot inthe arm.

"Some US asset managers who had sat the market out earlieron this year are getting involved again," said MacMahon.

But it's not just US investors who are piling into themarket.

"We have seen significant inflows from European investorsparticipating in dollar trades," said Deutsche Bank's Criqui.

"The order books have a 13% to 14% participation rate [fromEuropeans] this year versus 7% last year, as investors look topick up more yield in the dollar market."

NOT OVER YET

While the sheer number of deals led to some new issuesstruggling in the after-market this week, market participantsbelieve the pace of issuance is unlikely to slacken in the nearfuture.

"The wave is not over yet and although some issuers have hadto pay bigger new issue premiums because of the weight ofsupply, they are getting very attractive pricing," saidMacMahon.

The last time the basis was this negative was back in 2012,when the interbank market was very stressed. This time around,the favourable level for Europeans is partly driven by USborrowers swapping proceeds of their recent surge ofeuro-denominated bonds back to US dollars.

"If one views this move as excessive or temporary, then itcould also be an opportunity for Yankee issuers to lock infavourable basis swaps from US dollars to euros," a DCM head ofsyndicate said.

Banks are expected to come with more senior debt issues, butalso more subordinated debt after Credit Agricole's Tier 2 tradedemonstrated not only how much cheaper such deals are than thosein euros, but also the depth of demand - with a US$7.5bn bookfor a US$1.5bn deal.

"If you need Tier 2, the Yankee market is the obvious placeto go for many issuers," said MacMahon. (Reporting by Helene Durand, Natalie Harrison, Editing byMatthew Davies, Julian Baker)