Corporate Europe's Borrowing Binge


Investment banks in London, Frankfurt, and Paris thought corporate bond issues in Europe would grind to a virtual halt this quarter. After raising more than $600 billion in 2001, companies pulled in their horns last year as the euro-zone economy struggled to recover from recession. New-issue volumes slumped almost 20% during 2002.

By yearend, Salomon Schroder Smith Barney, UBS Warburg, and Deutsche Bank -- to name but three of Europe's leading corporate bond underwriters -- were gloomily predicting another 20% contraction could be on the way. That would add to the downward pressure on investment-bank profits, adding to the general gloom in a sector where thousands of jobs have been lost, salaries cut, and bonuses slashed over the past year.

So it came as a happy surprise when the bankers returned to work from their New Year festivities to find the new-issue pipeline for euro-denominated bonds almost clogged with offers. Companies as diverse as French telecom giant France Télécom (FTE), Anglo-Dutch packaged products group Unilever (UL), Spanish utility Repsol (REP), and British brewer Scottish & Newcastle have suddenly lined up to raise capital through new euro bond issues.

INVESTORS JUMP IN. What's more, plenty of investors were willing to buy. According to Dealogic Bondware, which tracks volumes in the fixed-income market, more than $30 billion in new corporate bonds were successfully sold off in the first two weeks of 2003, well above last year's level.

In part, that's because euro-zone interest rates have fallen since the European Central Bank's Dec. 5 decision to cut the level to 2.75%. That's generating a refinancing wave as companies seek to replace costly debt with cheaper securities. Meanwhile, investors are piling in because they fear interest rates could go lower, leading them to suspect they can find better deals now than will be available over the next year. At the same time, European corporate restructuring is continuing apace, as companies continue to respond to the arrival of the single currency and the creation of a truly unified market across the $7 trillion euro-zone economy.

Most important from the corporate point of view, though, is the looming threat of a war with Iraq. Companies are worried that a U.S. invasion might turn into a prolonged engagement, spawning new terrorist outrages in the U.S. and Western Europe. That could seriously damage the European economy and investor confidence. So it might be best to raise fresh borrowing now, goes the thinking.

TRAFFIC JAM. "We planned to raise more debt later this year, when we thought the markets might have improved," says Rudy Markham, the finance director of Unilever. "But we decided it was better to go earlier than later, given the possibilities that conflict in the Middle East could roil investors."

Continental companies are doing most of the issuing. European Investment Bank raised $3 billion from Jan. 6 to Jan. 10. That's half the amount of debt it expects to raise in 2003. German bank Kreditansalt f Wiederaufbau, German carmakers Volkswagen (VLKAY) and DaimlerChrysler (DCX), and Sweden's Volvo (VOLVF) all followed with large issues.

"I wouldn't be surprised if we jumped on the bandwagon," says a BMW spokesman. The Bavarian carmaker was planning to raise fresh money in the second or third quarters but says it might now move its borrowing program forward. Other car companies waiting in the wings are France's Renault and Peugeot (PEUGF). "We're looking for short-dated euro transactions," says a treasury official from Peugeot. "This seems the very best time to do it, so I expect us to come to the market this week or next."

CURRENCY TRADES.?Carmakers aren't the only ones tapping the markets. British brewer Scottish & Newcastle is planning a $500 million issue of five- to seven-year bonds. Italian luxury eyewear manufacturer Saflo wants to raise $300 million. And Eco Bat, a global battery recycler, is about to launch an issue for $185 million.

Some South and Central American outfits are also getting on board. Corporacion Andina de Fomento, the Venezuelan multilateral institution, sought $200 million in new money. Pemex, the Mexican oil company, has also been beating a track to investors. And they weren't just raising euros. Pemex may also go into the sterling market. France Télécom has been tapping both sterling and euro. Other companies prefer dollars -- especially as the greenback is losing value against the euro and should be easier to repay in future.

Sovereign borrowers are also raising money earlier rather than later. Representatives from Chile, Mexico, the Dominican Republic, and Costa Rica are all on the road right now, speaking to investors.

WINDOW OF OPPORTUNITY. All this activity means a lot of welcome business for the investment banks, most of which face an otherwise bleak year. However, the borrowing upsurge isn't likely to last for long, say experts. Companies are coming to market now because they fear they'll be unable to raise fresh money later on, especially if the Iraq crisis escalates into a major and lengthy conflict. They're also worried that increasingly sluggish economic growth in Europe will make investors more reluctant to part with their cash by the summer or fall.

"This is a temporary improvement, which is unlikely to last," says a fixed-income specialist with one leading London investment bank. "But it's a lot better than having nothing. The very fact anyone is borrowing anything in this environment is reason to cheer." A happy surprise, indeed. By David Fairlamb in Frankfurt


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