With two recent issues, GE Capital is readying for the future. The financial powerhouse is one of the first corporations to issue bonds in euro, not waiting until the common European currency goes into circulation on January 1 1999. Indeed, the American company's first issue came nearly a full year before rates will be fixed next spring between countries that qualify to join the monetary union.
GE's first deal, in May, was a 150 million euro bond with a seven-year maturity and a 5 1/8% coupon. The company chased it in September with a seven-year, 450 million euro issue paying 5.5%; both were underwritten by Paribas. Institutional investors, banks, and various governments, including those of Switzerland, Germany, and France, took up both issues.
It would seem a bold move denominating and buying bonds in a currency that doesn't yet exist, with exchange rates not yet set against other currencies.
Investors see buying euros as a way to take an early hedge. They are betting that, because the euro will be a major Western currency, second only to the dollar, the exchange rates will be as favorable or better than today's individual currencies. Governments, wanting the single currency to succeed, also want to encourage as much early liquidity as possible.
To date, 16 separate issuers have launched a total of 22 debt deals denominated in euros. GE Capital is the only non-European corporation yet to enter the fray and, indeed, is one of a handful of nongovernment issuers (see table, page 8).
Motives for issuing vary. Certain corporate issuers may wish to stockpile euros to back future trading and assets. But for GE Capital, the reality is somewhat more prosaic. In fact, all current euro-denominated bonds are being serviced in Ecu and will convert to euros only after the currency becomes a reality. Should monetary union be postponed, payment in Ecu will simply continue.
And, crucial to GE Capital's deal, the company is not holding Ecu-it immediately swapped proceeds from both bond sales into US dollars. "It was 99% the swap that got us in," says Jeffrey Werner, GE Capital senior vice president, assigning just 1% attraction to the fact that the euro broadened the company's investor base. More enticing, according to Mark Van der Griend, co-director of debt and derivatives marketing in Paribas Capital Market's New York office, the deal was 4-5 basis points lower than a direct dollar issue, even with the swap costs bundled in. Although GE Capital will eventually reconvert to euro when the bonds come due, Werner figures the glitches will be out of the system by that time and GE Capital won't take a loss. …