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More corporates seeking opportunities in currency arbitrage

Companies are increasingly taking advantage of differences in foreign currency pricing to borrow at lower costs, with euro-denominated debt issued by US companies set to reach record levels this year, according to data from Dealogic.

US companies borrowing more in euros

Data from capital markets analyst Dealogic suggests that 2016 is on course to outstrip the amount of euro-denominated debt issued by US companies last year. So far this year, they have issued $59bn-worth of euro-denominated debt, compared to $73bn in total in 2015.

These figures highlight a trend for US companies to access European capital markets to borrow in euros, taking advantage of the lower interest rates in EU countries that have come about largely as a result of quantitative easing.

'New role' for corporates

But it's not just the lower interest rates that are driving corporate borrowers across the Atlantic. As noted in today's Financial Times, corporates are more active in these markets because banks are pulling back. Capital markets correspondent Gavin Jackson writes: “In effect, companies have a new role. As changes to regulation lead banks to retreat from market-making — as well as using their extensive balance sheets to trade on their own behalf — the job of taking advantage of arbitrages and market dislocations increasingly falls to corporate borrowers.”

The FT article notes that companies are making risk-free returns by taking advantage of arbitrage opportunities in currency markets and interest rates. Specifically, they are selling bonds denominated in euros, which have a much lower coupon than bonds denominated in dollars. And they are using cross-currency basis swaps - contracts that help borrowers to transform a loan in one currency into a loan in another. Jackson explains: “Tougher bank regulation has made it more expensive for banks to write these contracts and that has increased their price and transformed the way in which companies sell bonds.”

CTMfile take: The FT article says there are risk-free opportunities to issue corporate debt at lower costs. Does this only apply to the biggest, most sophisticated corporate treasuries? We'd be interested to hear if our readers are taking note of this and if it's working for them.

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Financing Short-Medium Term Deficits
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By Paul Stheeman on 6th Oct 2016:

There is still no such thing as a free lunch. Arbitrage is ok, if the opportunity arises, but these are usually scarce. What concerns me most is that some US companies believe borrowing in EUR at lower rates could be risk-free. What happens if the EUR appreciates against the USD? Are US treasurers that naiv?

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