The World Comes to Wall Street

Foreign bond sales hit $5 billion

In 1964 Wall Street lost its traditional role of financier to the world. An Interest Equalization Tax (I.E.T.) first proposed by President Kennedy and passed during the Johnson Administration made it prohibitively expensive for Americans to buy foreign securities and effectively forced foreigners who had been accustomed to floating bond issues in the U.S. to borrow elsewhere. But I.E.T. was lifted in mid-1974, and since then the foreigners have come flooding back sell what they call Yankee bonds to Americans. According to Morgan Guaranty Trust Co., the total ofj public foreign-bond borrowings in the U.S.--mostly by governments --jumped from less than $500 million in 1973 to $4.5 billion in 1976. This year it will top $5 billion, and many Wall Street bankers expect even that figure to triple within another five years.*

The foreigners are coming to the U.S. for about the same reason Willie Sutton supposedly gave for robbing banks --that's where the money is. For all the talk of capital shortages, notes Richard Johannesen Jr., vice president of Salomon Bros., "the U.S. market is one of the biggest capital pools in the world." Adds Edgar Koerner, managing director of Kuhn, Loeb & Co.: "Borrowers can easily get $150 million and even $200 million for up to 20 years--terms that would be difficult in Europe." There, he explains, lenders do not have as much capital to advance and are reluctant to commit what they can lend for long periods on fixed interest rates. They fear that rampant inflation will make a rate that looks attractive now unfavorable in a decade or so. For American lenders, the advantage of buying the Yankee bonds is simple: they collect more interest. Foreign borrowers pay .5% to 1% more than the general yield on triple-A bonds issued by U.S. industrial corporations (now under 8% long term). Yet for foreign borrowers, this high cost of U.S. money remains competitive in most instances with interest rates in the Eurocurrency market, although currency fluctuations can make one or the other market momentarily more attractive.

Since 1974 more than 50 Yankee bond issues have been sold in the U.S., almost all by governments or organizations whose credit is government-guaranteed. Borrowers include the national governments of Australia, Finland and Norway; the city governments of Oslo and Stockholm; the European Coal and Steel Community and the European Investment Bank; the Japan Development Bank; the state-owned French railroad, telecommunications and electricity networks. Privately owned foreign companies still sell few bonds in the U.S.; they prefer to raise their money in Europe where, for all the disadvantages, there are no tough rules ordering disclosure of secret corporate information to lenders.

Government borrowers face a similar deterrent: the necessity of applying to Moody's and Standard & Poor's, the credit-investigating agencies, for ratings for their bonds. The foreigners, says Koerner, thought that ignominious: "Their feeling was, 'Dammit, we are a sovereign country. Why should these private American companies come and tell the world whether or not we have done a good job?' It was a bit like asking someone to take off his pants in front of someone he did not even know." Wall Street underwriters stress that going to the agencies is part of growing up and learning to live with the rules, laws and customs of foreign markets. In any case, they have found a way around the problem: the credit agencies are willing to conduct secret investigations of would-be foreign borrowers. If the bonds get the coveted triple-A rating that overseas borrowers still need to raise U.S. money easily, the issuer proudly lets the results be published; if not, it usually simply decides not to sell the bonds, and no one ever learns that it was investigated, let alone that its credit standing was considered less than tiptop. Many American investment institutions are banned by law from buying foreign bonds that are rated less than triple-A, and though Brazil and Mexico have sold bonds in the U.S. with no rating at all, they have had to pay higher interest.

Wall Street underwriters have not usually tried to sell Yankee bonds to individual investors. The big buyers have been the large institutional investors--insurance companies, pension trusts and mutual funds. So far they have done well: a study by Salomon Bros, shows that in the first nine months of 1977 one group of Yankee bonds returned actual gains (interest plus price appreciation) of 5% to 8.7%, v. a 2.3% gain on competitive longterm, high-grade U.S. corporate bonds. The stock market suffered serious losses over the same period. But, even though foreign bonds are outperforming competing investments, there are limits to how many more of them some of the big institutions can buy. For example, a state law forbids insurance companies doing business in New York--in effect, most of the big ones around the country--to invest more than 1% of their assets overseas.

So, the underwriters are busily peddling the Yankee bonds to smaller institutions, and there is talk of offering them to individuals as well. That effort might face another obstacle: memories of the 1930s, when an earlier wave of foreign-bond borrowings in the U.S. ended in massive defaults, and many of the bonds became worthless wallpaper. Still, few experts expect that to happen again--and, anyway, an interest premium is an interest premium.

* The figures exclude Canadian bonds, which, along with those issued by South American countries and some international organizations like the World Bank, were never subject to I.E.T.

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