Corporate America on a Borrowing Binge

Many companies are refinancing older, more expensive debt. Also: BearingPoint identifies ''material weaknesses'' in its internal controls; government incentive dollars being ''left on the table''; and more.


Thanks to historically low interest rates, U.S. corporate debt issuance continued to surge in the third quarter, as many companies sought to refinance older, more expensive debt.

During the first nine months of 2003, early redemptions of debt rose 90 percent over the same period in 2002, according to published accounts.

In the most recent three-month period, investment-grade issuance rose to $138 billion from $102 billion in the year-ago quarter, high-yield issuance rose to $34 billion from $5 billion, and convertible issuance climbed to $19 billion from $4 billion, according to Thomson Financial.

Year-to-date, investment-grade issuance rose nearly 9 percent to $492 billion, from $452 billion in the year-ago period, high-yield issuance soared 127 percent to $100 billion, and convertible issuance surged 61 percent to $79 billion.

Average yields on high-grade corporate bonds have fallen to 4.4 percent from 5.25 percent at the beginning of the year, according to Merrill Lynch & Co. Citigroup Inc. has been the top underwriter for investment-grade and convertible issuance for the year to date, and Credit Suisse Group’s Credit Suisse First Boston has been the top underwriter for high-yield issuance, according to Thomson.

One of the bigger issuers of the third quarter was Berkshire Hathaway Finance, a unit of Warren Buffett’s Berkshire Hathaway Inc., which trotted out its first unsecured debt offering in more than 15 years.

On Monday, it issued $1.5 billion equally in 5-year and 10-year notes. Proceeds of the notes will be used to finance activities at Vanderbilt Mortgage and Finance, a wholly owned subsidiary of Clayton Homes, which Berkshire bought earlier this year, according to Dow Jones, citing sources close to the deal.

The company is one of an elite group that carries a triple-A rating from Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings.

The last time Berkshire Hathaway issued unsecured debt was on January 21, 1988, when it sold $100 million in debentures, according to the wire service. It has raised money in the convertible bond market several times since then, however.

Meanwhile, a number of companies registered large shelf offerings earlier this week, suggesting that they are preparing to tap the capital markets in a big way.

They include General Motors, which earlier this year raised more than $17 billion in the debt markets. General Motors’ financing arm General Motors Acceptance Corp. filed a shelf registration to sell up to $15 billion worth of “Smartnotes,” due from nine months to 30 years from its date of issue. GMAC said it would use proceeds for general corporate purposes, including adding to its general funds and being available for the purchase of receivables, making loans, or debt repayment.

Thomson Corp. filed to sell periodically up to $2 billion in debt securities (denominated in U.S. dollars). It plans to use the net proceeds for general corporate purposes, including repayment of existing debt, said the Canadian publisher in its filing.

UnionBanCal, that parent of Union Bank of California, on Tuesday filed a shelf registration to sell up to $1 billion worth of common and preferred stock, depositary shares, and debt securities. It said it would use proceeds for general corporate purposes including possible securities buybacks, to add to working capital, and for acquisitions.

Finally, Lucent Technologies Inc. filed to periodically sell $1.75 billion in debt securities, common and preferred stock, and other securities. It plans to use the proceeds for debt service, preferred stock dividend requirements or redemptions, repurchases or retirement of debt or preferred stock, working capital, capital expenditures, or other general corporate purposes.

BearingPoint Identifies ”Material Weaknesses” in Its Internal Controls

BearingPoint Inc., formerly KPMG Consulting, announced in a government filing that its auditor, PricewaterhouseCoopers, had identified “material weaknesses” in its internal controls.

The material weaknesses primarily concern the “Germanic region,” the company added. Last year the company acquired consulting firms in Germany, Austria, and Switzerland; in August the company announced that it would restate earnings for the first three quarters of fiscal 2003 due to accounting adjustments related to those acquisitions.

The identified reportable conditions, according to BearingPoint, concern review and assessment of contract revenue recognition; monitoring of unusual work-in-process activity; cross-training of employees for key finance and accounting positions; and documentation for certain other accounting areas.

“These matters should be viewed in the context of the many special challenges for the company in fiscal year 2003 that placed much greater demands on our accounting function,” the company stated in its filing. Last year’s acquisitions — a series of transactions totaling $800 million, in 15 countries — “brought a variety of disparate accounting systems of varying quality, all of which had to be evaluated and integrated” into BearingPoint’s systems. The company also noted recent changes in the positions of chief financial officer and corporate controller.

BearingPoint said that it had implemented a new European financial accounting system and appointed a new controller with special responsibility for Germany and the other European practices. The company added that it is scheduled to implement a new North American financial accounting system during the third quarter of fiscal year 2004.

“In connection with these initiatives, all finance-related policies and procedures are currently being updated and enhanced,” it added. “Standard global documentation requirements have been established for the assessment of critical, significant and judgmental accounting areas, including the evaluation of contract revenue recognition for non-standard contracts.”

BearingPoint hired PricewaterhouseCoopers in June after dismissing Grant Thornton, reported Dow Jones. The company also said that in July it hired Ernst & Young LLP to provide a global internal audit function.

Government Incentive Dollars Being ”Left on the Table”

Most U.S. companies have taken advantage of tax and other incentives from state and local governments for expansion, consolidation, and relocation activities.

According to a survey by KPMG LLP, however, most of these companies also conceded that they haven’t realized the full array of available incentives and credits.” Nationwide, a significant percentage of available incentive dollars are still being left on the table,” said Tammy Propst, a principal in KPMG’s state and local tax practice. Propst did note that “more companies are making greater use of benefits available, especially for capital expenditures, job creation and training activities.”

All 50 states offer some type of incentives or tax credits to companies that choose to expand or relocate within the state, according to KPMG.

Of the 205 senior corporate-tax and real estate professionals surveyed by KPMG, 63 percent said that their companies have increased the use of incentives and tax credits in the last five years, significantly more at the state and local levels than at the federal level. Yet 65 percent admitted they have taken advantage of three-quarters or less of the available dollar value of benefits. Their main reasons for missing out: “not acting to qualify” and “lack of awareness of benefits.”

Another possible reason, suggested KPMG, is that no single person in the organization is responsible for all tax credits and incentives. At 79 percent of the surveyed companies, responsibility for credits and incentives resided with two or more people, often working in different areas of the organization.

Although many companies haven’t taken full advantage of the incentives, 55 percent of respondents felt that incentives and tax credits play a critical role in making final strategic decisions for expansion, relocation, and consolidation. Incentives and credits are particularly important in decisions on capital expenditures (35 percent), real estate portfolio management (30 percent), mergers and acquisitions (30 percent), business expansion (28 percent), and business relocation (28 percent).

Job-creation tax credits (64 percent) and sales tax exemptions (63 percent) were the state and local incentives and credits cited most often in the survey. They were followed by property tax abatement (52 percent), enterprise zone tax credits (51 percent), and job training/retraining benefits (51 percent).

On the federal level, credits were used most by companies for research (39 percent), worker/welfare-to-work programs (33 percent), and empowerment zone initiatives (26 percent).

Other major survey findings:

  • Automotive firms are ahead of other industries surveyed in realizing credit and incentive opportunities; 95 percent believe they are receiving all the benefits available to them.
  • Banking firms plan to expand more in the next 12 months than other sectors surveyed, but only 11 percent said that tax credits and incentives are a major influence in their real estate decisions. The survey also indicated that banks are taking advantage of statutory and compliance-related incentives and credits, but not those that are negotiated.
  • Although the majority of consumer products firms have increased their use of incentives and tax credits over the past five years, most have realized less than 75 percent of the dollar value of available benefits.
  • For the retail industry, resource constraints have been the largest barrier to taking advantage of incentives and tax credits.

Short Takes

  • D.R. Horton Inc. announced that chief financial officer Sam Fuller has been promoted to the post of senior executive vice president. Bill Wheat, previously senior vice president and controller, was named as CFO and elected to the board.
  • A Watson Wyatt analysis of the nation’s 1,000 largest companies found that nearly two-thirds have an underfunded pension plan. For the typical large plan, however, the benefits-consulting firm also found that the ratio of unfunded pension obligations to total corporate assets is less than 4 percent.

“Relative to total corporate assets, the unfunded pension liabilities of most large companies are not excessive,” maintains Sylvester Schieber, director of research at Watson Wyatt.

  • The SEC said that J.P. Morgan Chase & Co. Inc. agreed to pay $25 million to settle an investigation into allocation practices for its initial public offerings.

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