Coke Gulps Cheap Debt Through Thirst For Yield

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The latest splash into European bonds by Coca-Cola’s ­bottling arm illustrates the fizzy quality of the market.

In 2013, the company came to market with bonds maturing in 2020 and carrying a coupon, or regular interest payment, of 2.375 per cent. Now the group is back, this time to buy back those €800m in bonds. It is offering to pay holders 102.24 cents on the euro in the process and will chop the bonds out for newer, cheaper debt. In the process, it will push out repayment dates to eight- and 12-year maturities.

The switch-up shows that, by some measures, borrowers in Europe have never had it so good. Perhaps ironically, it also demonstrates a sense of nervousness about what lies ahead. “Nearly all our clients. . . are trying to take advantage of the market window,” said Tomas Lundquist at Citigroup, one of the banks handling the pop-bottler’s deal. The cost of borrowing, which last year looked on the charts “like the Matterhorn”, had collapsed, he said.

Companies are strongly incentivised to scrap pricey debt and lengthen maturity profiles with super-cheap new money. Deutsche Bank summed up the environment in April. “These really are extraordinary times for core country European corporate funding levels,” it said in its annual study of corporate defaults. “The funding conditions for corporates in real terms are at levels that likely haven’t been seen in generations.” US corporate issuers have clearly taken notice; the number borrowing in euros this year is up 300 per cent compared with the start of 2018. Pulling down the cost of borrowing is the European ­Central Bank, which has pushed back plans to tighten monetary policy and is instead helping the region’s banks with another round of cheap loans.

The notion that central bank asset-buying programmes were a post-crisis blip is now fading. “I used to think QE was an anomaly,” as one debt banker put it recently. “Now I think it’ll be around for the rest of my career.” Europe’s benchmark rates are back in the freezer. Ten-year German government bonds now yield minus 0.05 per cent — meaning buyers face a guaranteed nominal loss for holding the paper to maturity that all leaves investors scrambling for yield. Any yield. So, even at these prices, are companies paying too much to borrow? Possibly, said Mr Lundquist, but with a caveat. “We saw what happened at the end of last year,” he said, alluding to sharp moves downwards in global markets. Donald Trump’s latest salvo on Chinese trade is a reminder that markets are vulnerable. “Things could change, even if the credit markets remain robust,” he said. By that measure, it makes sense to get in now, while the going is good.

 

Culled from Financial Times

Samson Oyedeyi

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