Although the subject matter below is based on real-world experience, all characters, figures, and settings are fictitious and are not based on the financial situation or strategy of any specific company.
From: CFO, Any U.S. Investment-Grade Company
To: Treasurer
Priority: High
Subject: Anything we can do to take advantage of such low borrowing costs?
From: Treasurer
To: CFO
Priority: High
Subject: Re: Anything we can do to take advantage of such low borrowing costs?
Good Morning, Boss:
I am almost certain that borrowing costs for investment-grade companies have NEVER been lower. I have maxed out the most reliable data sources and cannot find a time when U.S. corporations could issue debt at lower interest rates. The driving force behind this low-rate environment is investor demand for both yield and safety.
Investment-grade debt has become the best game in town for investors, as it offers reasonable safety and return at a time when the stock market is one bad headline away from a crash and U.S. Treasuries offer paltry yields. This high demand for quality corporate paper, combined with such low Treasury rates, has greatly compressed corporate credit spreads, pushing all-in bond coupons to unprecedented levels (bond coupons = reference Treasury rate + corporate credit spread).
So, without further delay, I give you five great ways to take advantage of cheap debt:
Capital expenditures. It may seem like the global economy is doomed forever but we should be optimistic. Now is the time to open that new plant, purchase that new fleet, and develop that new product. We can borrow at 2%, 3%, or 5% for 5, 10, or 30 years, respectively. Let’s reinvest in the business in anticipation of better times; when demand returns, we will be thanking ourselves for recognizing and seizing a great opportunity.
Acquisitions. Another great way to invest in our business is via acquisition. Let’s go after those targets we have been eyeballing the past few years. We can justify paying a full valuation with the low hurdle rate set by borrowing costs. While other companies sit on the sidelines and wait for Congress to save the economy, or destroy it, we can be proactive in growing our business.
Pension contributions. Defined-benefit pension plans remain grossly underfunded. Falling discount rates and government regulation have created the perfect storm, inflating pension liabilities so much that pension asset returns have no chance of closing the gap. By issuing low-cost debt and contributing the proceeds to pension assets, we can finally catch up and get our funded status closer to 100%. As an added bonus, a debt-financed pension contribution is both tax deductible and leverage neutral (rating agencies treat unfunded pension liabilities as debt).
