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Low Rates Deliver an Early Christmas

By October 3, 2019 December 20th, 2019 No Comments

Corporates issuing debt at rock-bottom rates exult after reaping major savings.

“Sometimes the market gives you a gift,” exclaimed one treasurer at a recent NeuGroup meeting while recapping highlights from the last few months. In this case, the gift came in the form of $300 million in net present value savings after the company took advantage of the late-summer swoon in interest rates.

  • The company cashed in by calling—at par—30-year-bonds yielding 4.2% and replacing them with debt yielding 3.1%. And yes, the timing of low rates matching up with the bonds’ call dates was sweet serendipity. 

Another treasurer who joined the cavalcade of corporates issuing debt last month—Bloomberg reports that companies sold more than $308 billion of notes in September, the first time ever that corporate issuance has topped $300 billion in a month—said strong demand for his company’s big debt deal produced “massive” NPV savings, making the issue a “home run.”

Timing is everything. Members agreed that treasury needs to have the ability to take advantage of the opportunities—or gifts—that fixed-income markets provide. “Timing in volatile markets is critical,” one participant said. That recalls a key takeaway from a NeuGroup meeting of mega-cap treasurers in 2017: 

  • Winning authority from the board to go to capital markets opportunistically is a best practice. Treasury needs to have authority from the finance committee to refinance or issue debt when market stars are in alignment. This provides the flexibility to act fast, and members agreed it’s ideal for everyone as long as there’s full transparency between treasury and the board of directors.

    One member said his department does not have multi-year authority but hopes to get there. Another half-joked that the finance committee thinks it’s smarter than it is. 

The flexibility to say “no go.” Equally important to having the authority to strike while the market iron is hot is having the right and judgment to say “no go” to the banks underwriting a bond issue if conditions have soured the morning the deal is scheduled.

“You want to give yourself the timing flexibility from a funding, liquidity and organizational standpoint to provide a larger window of timing options so that you aren’t boxed into one specific date,” one treasurer at the meeting said.

Christina Popik

Author Christina Popik

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