Bernanke Saves Companies $700 Billion

Corporate bond yields averaged over the last four years 4.6%, vs. 6.14% in the five years prior to Lehman's demise.

America’s companies, from Apple Inc. to Verizon Communications Inc., are saving about $700 billion in interest payments with the Federal Reserve’s unprecedented stimulus.

Corporate bond yields over the past four years have fallen to an average of 4.6 percent from 6.14 percent in the five years before Lehman Brothers Holdings Inc.’s demise, a savings equal to $15.4 million annually per every $1 billion borrowed. Businesses took advantage of the Fed’s largesse to lock in record low rates, extend maturities and raise cash by selling $5.16 trillion of bonds, data compiled by Bloomberg show.

“The stimulus was a huge saving grace in the economy overall,” said J. Michael Schlotman, the chief financial officer at Cincinnati-based Kroger Co., the grocery store operator that estimates it’s paying about $80 million less in interest than it would have pre-crisis. “It probably kept some businesses from failing because they were able to refinance their debt at lower interest payments.”

The combination of a near-zero rate policy and more than $3 trillion of bond purchases by the Fed since December 2008 means that the collective interest savings enjoyed by Apple, Verizon and more than 2,000 other corporate borrowers exceeds Switzerland’s $632 billion economy.

That’s money freed up to expand businesses and hire workers. Corporations boosted their capital expenditures to $699 billion in the three months ended June 30, about the most in a decade, and up 8.7 percent from the corresponding period last year, according to JPMorgan Chase & Co. Even the neediest companies have been able to obtain cash as the trailing 12-month U.S. speculative-grade default rate has plummeted to less than 3 percent from more than 13 percent back in 2009.

Drugstore chain Rite Aid Corp. and residential property firm Realogy Corp. are two of the 283 junk-rated borrowers identified in March 2009 by Moody’s Investors Service as being at the highest risk of default that have since sold bonds.

After plunging to 9.5 cents on the dollar in March 2009, Camp Hill, Pennsylvania-based Rite Aid’s $295 million of debentures due February 2027 have rebounded to 101.38 cents, as their yields fell to 7.53 percent from 80 percent.

While borrowing costs are starting to rise in anticipation that the Fed will start reducing stimulus measures, they’re still below pre-crisis levels and enticing borrowers. Verizon sold $49 billion of bonds last week in the biggest corporate offering on record.

 

Quantitative Easing

When Fed Chairman Ben S. Bernanke started to pump cash directly into the financial system in December 2008 by purchasing bonds in a policy known as quantitative easing, unemployment was the highest in 26 years and companies rated below Baa3 at Moody’s and less than BBB- by Standard & Poor’s faced $1.2 trillion of debt maturing through 2015. That’s been cut to about $115.8 billion, according to Barclays Plc.

“The benefits of quantitative easing include the confidence that it gave to markets, which allowed credit markets to re-open,” said Eric Gross, a Barclays credit strategist in New York. “If a company can get to the primary market and pay off its obligations, it can live to fight another day. The problem back then was the primary market was completely closed.”

Companies sold just $21.9 billion of investment-grade and high-yield bonds in the month after Lehman collapsed on Sept. 15, 2008, less than half the size of Verizon’s sale last week.

Kroger’s $3.1 billion of bond sales in the past four years included $600 million of 10-year notes sold in July with a 3.85 percent coupon. That’s below the 6.4 percent for similar-maturity debt that the largest supermarket operator in the U.S. issued in August 2007, data compiled by Bloomberg show.

Schlotman said the interest savings gave him the confidence to ask Kroger’s directors to approve $10 billion in capital expenditures and boost employment by 35,000 jobs over the past five years. The company had 343,000 employees as of Feb. 2, data compiled by Bloomberg show.

Savings of about $700 billion represents the difference between what companies that have sold bonds since Sept. 17, 2009, are paying based on an average maturity of nine years for securities in the Bank of America Merrill Lynch U.S. Corporate & High Yield Index, versus what they might have paid before the crisis.

 

IBM’s Record

After rising as high as 11.1 percent on Oct. 28, 2008, it wasn’t until Sept. 17, 2009 that yields fell below the pre-Lehman average of 6.14 percent, the Bank of America Merrill Lynch index shows.

International Business Machines Corp., the largest computer-services provider, sold $1.25 billion of seven-year notes in May at a record low coupon of 1.625 percent. That compares with a 5.7 percent rate on 10-year debt issued in 2007 by the Armonk, New York-based company.

Verizon, the largest U.S. telephone carrier after No. 1 AT&T Inc., issued $49 billion of bonds in eight parts on Sept. 11 in the biggest sale on record to help fund its $130 billion purchase of the rest of Verizon Wireless from Vodafone Group Plc. On the $11 billion portion due in 10 years, the New York-based company is paying a coupon of 5.15 percent, less than the 5.5 percent on similar-maturity notes it sold in March 2007.

Verizon’s offering exceeded the previous record of $17 billion set on April 30 by Cupertino, California-based Apple. That sale, the iPhone-maker’s first since 1996, included $4 billion of 1 percent five-year notes and $5.5 billion of 2.4 percent 10-year securities.

With the economy now firming, the Fed has been considering curtailing its stimulus. The central bank unexpectedly refrained today from reducing the $85 billion pace of monthly bond buying, saying it needs to see more signs of lasting improvement.

Yields on 10-year Treasuries, a benchmark for everything from corporate bonds to mortgages, have risen to 2.76 percent as of 2:17 p.m. in New York, after reaching as high as 2.99 percent on Sept. 5, from 1.76 percent on Dec. 31. Apple’s 2.4 percent bonds have fallen 11.3 cents since they were issued to 88.6 cents on the dollar, pushing the yield up to 3.83 percent.

The Fed embarked on its stimulus in the face of an economy spiraling into the worst financial crisis since the Great Depression, when a collapse in the subprime mortgage market and deteriorating property values led to the forced sale of Bear Stearns Cos. and the demise of Lehman.

 

Early Benefits

Mortgage financiers Fannie Mae and Freddie Mac were placed into government conservatorship, insurer American International Group Inc. agreed to a U.S. takeover to avert collapse, Merrill Lynch & Co. was compelled to sell itself to Bank of America Corp. and automaker General Motors Corp. faced insolvency.

To bring down a jobless rate that eventually reached a peak of 10 percent in October 2009, the Fed cut its target rate for overnight loans between banks to a range of zero and 0.25 percent and started buying Treasuries and mortgage debt on Dec. 5, 2008.

Within the first 30 days of the program’s onset, yields on dollar-denominated corporate bonds dropped a percentage point to 9.8 percent on Jan. 5, 2009, Bank of America Merrill Lynch index data show. By the time the Fed started its second round of QE on Nov. 12, 2010, yields on the notes had plunged to 4.6 percent, less than half what they were two years earlier.

“It’s allowed companies such as ourselves to continue to access the capital markets,” Dan D’Arrigo, the executive vice president and chief financial officer of Las Vegas-based casino company MGM Resorts International, said in a Sept. 17 telephone interview. During the crisis, “we still had access but at much more costly rates to our company,” he said.

MGM, which runs the Bellagio and MGM Grand casinos, was able to lower its interest expenses by $230 million in December, to about $770 million annually, refinancing debt with $4 billion of loans and $1.25 billion of bonds, according to a Dec. 20 statement from the company.

As credit loosened, corporate yields plunged as low as 3.35 percent on May 2, from 9.76 percent at the end of 2008. Verizon has led $1.1 trillion of dollar-denominated issuance this year, on pace to surpass last year’s record $1.47 trillion, data compiled by Bloomberg show.

Refinancings have cut the amount of speculative-grade bonds and loans set to mature in 2014 to $43.7 billion, compared with $331.5 billion when the Fed started its QE program in 2008.

 

‘Maturity Wall’

“There was this maturity wall that people were terrified of,” said Neil Wessan, the group head of New York-based CIT Group Inc.’s capital markets unit. “That’s been spread out over a much broader period of time.”

CIT emerged from a month of bankruptcy protection in December 2009. After a $592.3 million loss last year, analysts surveyed by Bloomberg forecast CIT will report its highest earnings in 2013 and 2014 since exiting bankruptcy.

The business lender sold 5 percent securities in July that are due in August 2023 to yield 5.125 percent. That’s below the 6.625 percent coupon on seven-year notes it issued in March 2011, data compiled by Bloomberg show.

“The availability of all this excess liquidity has allowed the market to re-price, amend and extend,” Wessan said. “That took a lot of pressure out of the system.”

Fed Governor Jeremy Stein warned in February that some credit markets, such as corporate debt, were showing signs of excessive risk-taking. Investors poured $758.7 billion into U.S. bond funds in the four years after 2008, according to research firm EPFR Global in Cambridge, Massachusetts.

“We are seeing a fairly significant pattern of reaching-for-yield behavior emerging in corporate credit,” Stein said at the time in a speech in St. Louis.

Company debt loads in the U.S. have increased faster than cash flow for six straight quarters. Debt of investment-grade companies rose in the second quarter to 2.09 times earnings before interest, taxes, depreciation and amortization, according to JPMorgan. That’s up from 2.07 times in the first three months of 2013 and compares with 2.13 in the third quarter of 2009, when it peaked after the longest recession since the 1930s.

Rite Aid, which lost money in five of the past six years, sold $810 million of eight-year debentures in June paying 2.5 percentage points less than similar-maturity debt it issued last year.

The most indebted U.S. drugstore generated $504 million of free cash in the 12 months ended March 2, the most since at least 1996. Rite-Aid, which Moody’s placed on its “Bottom Rung” list in its March 2009 report, is ranked B3 by the ratings firm and B- by S&P, both six levels below investment grade.

Susan Henderson, a spokeswoman for Rite Aid, didn’t respond to a telephone and e-mail message seeking comment.

 

Realogy Cuts

Madison, New Jersey-based Realogy, the most indebted U.S. real-estate services company, has decreased its total interest expense to $255 million from $672 million in 2012, Chief Financial Officer Anthony Hull said in a July interview.

A strengthening economy may help indebted companies meeting interest payments even with yields on the Bank of America Merrill Lynch U.S. Corporate & High Yield index having risen to 4.23 percent, 0.64 percentage point more than at the end of 2012.

Gross domestic product is expected to grow by 2.65 percent next year from 1.6 percent this year and after contracting 2.8 percent in 2009, according to 81 economists surveyed by Bloomberg. The unemployment rate was 7.3 percent in August.

The Fed’s QE “was the right thing at the right time,” Kroger’s Schlotman said. “You can’t keep rates here forever. At some point, market forces have to drive your ability to succeed in the marketplace.”

 

Bloomberg News

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