European Companies Chase New Investors Through Private Sales

By Nina Trentmann Features Dow Jones Newswires

European companies have stepped up the sale of securities directly to investors as they seek to diversify their funding amid fears of tighter monetary policy.

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German rail operator Deutsche Bahn AG, Vodafone Group PLC and Deutsche Telekom AG are among the companies pursuing investors from Asia as they prepare for interest rates, and debt costs, to turn higher.

The rise in private placements highlights that finance chiefs in Europe are preparing for a change in monetary policy after a prolonged period of ultralow and negative interest rates.

Many companies have loaded up on debt, taking advantage of low borrowing costs. CFOs now worry that a shift to less accommodative monetary policies-- expected for 2018--could trigger market volatility similar to America's taper tantrum that dominated the summer of 2013.

In the U.S., the Federal Reserve wind-down of monetary stimulus was accompanied by a decline in liquidity in the bond market and an uptick in yields.

To limit such risks, CFOs of European companies are working to broaden their funding sources by developing closer links to investors in Asia.

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Deutsche Bahn AG, the German rail operator, in July did a private placement in Swedish krona for institutional investors in South Korea. The 15-year placement had a volume of SEK530 million ($65 million) with a coupon of 2.2%, according to Deutsche Bahn.

"We want to broaden our investor base and reap cost benefits," said Christian Große Erdmann, head of capital markets and risk management at Deutsche Bahn. The company has for a number of years worked with investors from Japan, Hong Kong and Australia and has now begun to develop ties with investors in South Korea. "This is new," Mr. Große Erdmann said.

Vodafone Group PLC, the British telecommunications firm, this summer did private placements in Japanese yen and in Hong Kong-dollar. The two placements in Hong Kong-dollar had a total volume of HKD$1.005 billion ($128.5 million), whereas the placement in yen was worth around $92 million. "This is the first time we ever did a placement in Hong Kong-dollar," a member of the company's treasury department said.

Vodafone is actively seeking to diversify its investor base in a bid to reduce the reliance on bond sales, he added.

Other companies are following suit. European firms issued private placements in euro worth $12.79 billion during the first half of the year, up from $10.95 billion during the first half of 2016, according to Dealogic Ltd. The volume of placements in other European currencies also went up, from $10.63 billion to $13.98 billion. Private placements by Asian subsidiaries of European companies rose from $28 million to $334 million during that time.

"We have been watching this trend for a while," said Isabelle Toledano-Koutsouris, head of corporate debt capital markets and derivatives for Europe, Middle East and Africa at UBS Group AG in London. It illustrates that both corporates and investors are willing to explore new avenues, Ms. Toledano-Koutsouris said.

The trend comes on the back of rising bond sales by European companies in Asia.

"A lot of Asian investors want to diversify their investment portfolio," Ms. Toledano-Koutsouris said. This and the search for yield makes Asian investors--in particular South Korean life insurance companies--seek opportunities in Europe.

Due to the nature of private placements, only the dealer, the issuer and the investor are familiar with the rationale and the exact details of a certain deal, according to Marko Milos, managing director at Goldman Sachs Group Inc. in London. The bank executed at least one of these placements recently.

So far, the impact on markets has been limited, as private placements make up less than a 10th of the volume of corporate bonds. European firms issued Eurobonds worth $175.42 billion during the first half of 2017, up from $157.23 billion during the same period in 2016. The volume of issuances in other European currencies also ticked up, from $30.78 billion in the first half of 2016 to $52.87 billion in the first six months of 2017, according to Dealogic.

Private placements on average range from EUR25 million ($29.4 million) to EUR150 million, Ms. Toledano-Koutsouris said.

Deutsche Telekom AG, the German telecommunications firm, said it doesn't want to rely on certain investor groups too heavily. "This requires smart diversification in terms of the volume, the currency, the duration and the financial instrument," a spokesman said. Deutsche Telekom recently issued private placements in Hong Kong-dollar and Norwegian krone, the spokesman said. The combined value of these amounted to $294 million, he added.

Write to Nina Trentmann at Nina.Trentmann@wsj.com

(END) Dow Jones Newswires

August 11, 2017 08:51 ET (12:51 GMT)