Bonds Across the Sea

In need of funds to expand European operations and limited by the Administration's balance-of-payments guidelines in the amount it can send from home, Honeywell Inc. of Minneapolis is about to try a solution that has become increasingly popular among U.S. corporations. Working through the Zurich office of the New York investment house of White, Weld & Co., Honeywell will market a $20 million bond issue among the financial centers of Europe. Without straining the balance of payments, the company will thus get all the money needed for expansion, although at a slightly higher rate than it would have paid at home.

Honeywell thereby joins the parade into a European bond market where virtually no U.S. corporation had ever dealt--until seven months ago. Since then a dozen companies, including Socony Mobil, U.S. Rubber, General Electric, Gulf, IBM and Du Pont, have floated bond issues in Europe. Altogether they raised $297 million, or a quarter of all the world's bond money gathered outside the U.S. during the year; between bonds and bank borrowing, American companies accounted for the largest share of Europe's financial activity. In 1966 U.S. firms expect to spend about $1.5 billion on European expansion, and at least 30 companies intend to try the overseas-bond-financing technique. On the heels of Honeywell, Phillips Petroleum is planning a $25 million issue to finance overseas spending.

Simple in Luxembourg. The major alternative is to borrow from European banks. But in Europe's limited markets, U.S. companies already have borrowed about as much as they can. Moreover, loans from European bankers are often tied to development within the country where money is borrowed. Bond money can be spent anywhere; Honeywell has earmarked its $20 million for operations in Britain, Germany, France and Holland. The best part of all is that bonds are tax-free if issued through specially chartered holding companies. Such companies are not hard to set up. The state of Delaware will charter any holding company that derives 80% of its income from abroad. As for little Luxembourg, it makes chartering as simple as writing a check.

Among Europeans, such arrangements on the part of U.S. businessmen arouse anger as well as pleasure. Pleased are the affluent and usually anonymous international investors--London's Economist tartly calls them "international tax dodgers"--constantly seeking new ventures with which to multiply their new wealth. Still intensely nationalistic in financial matters, European governments discourage outsiders from entering their bond markets by imposing coupon taxes ranging up to 25% on alien bond purchases. American bonds, on the other hand, being tax-free and easily transferable, are snapped up in $10,000 and $20,000 lots by zip-lipped Swiss bankers representing unmentioned clients.

Easing in New York. The situation, however, annoys European governments and agencies whose own issues are shouldered aside in the rush for American issues, which pay less interest but often have the attraction of convertibility into shares of common stock. Recent Dutch and Finnish bond issues sold badly; the European Coal and Steel Community has postponed a $20 million issue in view of market uncertainty as has the Transalpine Pipeline Co.; the Swiss bond market has sagged 10% in recent months as investors have sold European holdings to buy American. Europeans are increasingly waspish about the disproportionate share of their limited market that U.S. bonds already hold.

Ironically, the rush of Americans abroad may soon allow Europeans to return for money to the New York markets they favored--until the Kennedy Administration's 1963 interest equalization tax made Manhattan seem too expensive. So many U.S. companies are moving into European markets that interest rates are rising; where earlier issues went as low as 5 3/4%, the rate now is up to around 6 1/4% . On European companies' bonds it is even higher. At those levels, it is just as practical for Europeans to come to New York for money. If they do, their activity would increase the balance-of-payments strain that U.S. borrowing abroad was supposed to alleviate.

This file is automatically generated by a robot program, so reader's discretion is required.