The first six months of 2015 saw the emergence of the “Reverse Yankee” bond market. What exactly is a Reverse Yankee, and what makes it of interest?
Simply put, a Reverse Yankee is a bond issued by a US company, usually high grade, outside of the US and denominated in a currency other than US dollars. Recent notable issues of Reverse Yankees include Coca Cola and Apple.
Attractions for the Issuer of Reverse Yankees
There are several benefits for the issuer of a Reverse Yankee Bond. These benefits include:
- Favorable financing cost when compared to the US Domestic Corporate Bond Market. Most of these issues have achieved a cost saving of between 1% and 1.5% per annum.
- A way to short the euro on a long term basis.
- A way of hedging balance sheet translation exposure.
- A way of hedging business economic exposure.
Attractions for the Investor in Reverse Yankees
There are also benefits for the investor in a Reverse Yankee Bond. For example:
- For a fund manager who is benchmarked, a small yield pickup without going down the credit spectrum.
- For a money market investor, by using an asset swap and an FX forward a way to earn a spread for the investor
Eliminating FX Risk with a Reverse Yankee Bond
Using a non-domestic currency to finance a business can lead to foreign exchange exposure unless the company issuing the debt has either a future receivable or an asset denominated in the currency of issue. In which case, the foreign exchange risk is eliminated because the company has both an asset and a liability denominated in foreign currency.
Using the Proceeds of Reverse Yankees
Another way of using the proceeds of Reverse Yankees is with a bond issue and currency swap to raise US dollars. This may be slightly more problematical for two reasons:
First, banks may not be enthusiastic about longer term cross currency swaps because they are very capital intensive. However it may be possible to overcome this problem with reset clauses in the currency swap documentation.
Second, the basis swap may be trading too expensively and may neutralize the funding advantage of a bond and currency swap.
Reverse Yankee Bonds—Good Idea or Bad?
Who wins with a Reverse Yankee Bond? Are they a good choice for issuers and investors alike? In my recent article, The Birth of a New Type of Bond–Reverse Yankee, I explore the Coca Cola and the Apple issuances in more depth and analyze the problems, solutions, possible advantages, and possible disadvantages for each organization. Of course, time will tell whether the issuers or the investors ultimately achieve their goals, but until then let us have your thoughts!