Foreign Currency Denominated Borrowing in the Absence of Operating Incentives

Abstract

It is well known that corporations issue foreign currency-denominated debt to hedge foreign currency cash flows with offsetting interest payments. We test an alternative motive for foreign currency-denominated borrowing. We do so by constructing a comprehensive sample of foreign currency-denominated bonds issued by sovereign government and agency issuers all of whose cash inflows are exclusively denominated in their respective local currencies. We find strong and consistent evidence that the prevailing covered and uncovered interest yields across currencies matter to these borrowers in choosing the currency in which to denominate their international debt. We estimate the average gains to opportunistic covered yield borrowing at 4 to 18 basis points. Interestingly, we also find that the average bond offering in our sample precedes a large and beneficial depreciation in the selected currency in the year following the issuance. These results support what has been a frequent conjecture in the foreign debt market.