* Top credits raise funds in currency
* Low coupons attract issuers
* Basis swap unattractive, however
By Sudip Roy
LONDON, Feb 26 (IFR) - Top-notch issuers from the emerging markets are targeting the euro market as they seek to lock in low coupons and diversify their investor bases.
Peru joined the growing crowd on Tuesday with its second deal in the currency in less than six months. It became the fourth Latin American borrower in the currency this year, following Chile, Mexico and Andean Development Bank, CAF.
Korean agency Kexim, meanwhile, announced a mandate for a new transaction. Also, Singapore investment company Temasek made its debut in the currency this week, though with Triple-A ratings it’s in a different category entirely.
Bankers say more deals are likely, though caution that only the best-quality issuers have access. In addition, the economics of the trade may not make sense for all.
Peru, for example, paid up to issue its 1bn 3.75% 14-year deal compared with the dollar market, but bankers said the sovereign is likely to be less sensitive as it will keep the proceeds in the single currency.
The pricing level of mid-swaps plus 295bp - the equivalent of about dollar Libor plus 387bp - was more than 100bp wide of the estimated 250bp fair value spread on a new 14-year dollar bond, said a syndicate manager away from the trade.
Peru is handicapped by not being in the OECD, which prevents some core European accounts investing in the sovereign.
In contrast Mexico, which is a member of the OECD, priced 1.5bn 1.875% six-year and 1bn 3.375% 15-year notes earlier this month flat to its dollar curve after accounting for a new issue concession in the US market, according to one banker.
By going to the euro market, Mexico was continuing its strategy of diversifying its funding base at a time when market access and costs are less certain.
Kexim too is seeking to access the euro market for strategic reasons, though attractive coupons help.
”“We’re looking at euros for a couple of reasons. Interest rates are lower so we’re expecting more Korean companies will need to lend from us for outbound M&A and projects on the continent. We’re going to keep the net proceeds from our upcoming deal in euros,” said a funding official at the agency.
“From a cost-management perspective, it also makes sense to hold on to a currency that is cheaper to borrow than US dollars.”
In yield terms that is true but for those thinking about swapping euros back to US dollars, the economics are not as attractive.
For a company to issue in euros and then swap it back to dollars would cost around 60bp on a five-year note, for example. The cross-currency swap has become more expensive even since a host of US companies, including biotech outfit Amgen, technology company Honeywell and aircraft manufacturer United Technologies raised euros earlier this month. Another US issuer, chemicals company LyondellBasell, issued in the currency this week.
For that reason, bankers say it’s unlikely a swathe of EM names will hit the euro market, particularly lesser-rated credits. “The dollar market is more attractive unless you are a corporate with specific euro needs,” said a syndicate official in London.
Investors, too, are unlikely to engage unless a big premium is on offer. With investment-grade Peru (A3/BBB+/BBB+) offering a yield of 3.773%, bankers say there is little need for European investors to go further down the credit curve. (Reporting by Sudip Roy (additional reporting by Paul Kilby and Frances Yoon); editing by Julian Baker)