CFOs Using Bond Proceeds to Pay Down Credit Lines, Debt
October 28 2020 - 4:59AM
Dow Jones News
By Nina Trentmann
Many companies in recent months raised billions of dollars in
new debt in the bond market, taking advantage of low funding costs
and high investor demand.
Finance chiefs used the additional capital to bolster their
companies' balance sheet, pay down credit lines or replace older
debt following interventions by the Federal Reserve to stabilize
financial markets. Most didn't, however, use the funds to invest in
their businesses, according to a recent study of about 9,500 bond
sales by Columbia Business School.
"We find that a lot of issuers issue earlier in their cash cycle
than usual, are in sectors that are not the most affected by Covid
[and] use the proceeds to hoard cash or repay debt, not invest in
their operations, " said Olivier Darmouni, an associate professor
for finance and economics at Columbia Business School and one of
the authors of the study.
As a result, the bond market recovery between March and the end
of June -- the period the researchers analyzed -- is unlikely to
result in a "V-shaped" recovery in the broader economy, the study
said. U.S. economic growth has contracted sharply since the
coronavirus pandemic took off in the spring, and the pace of
recovery has slowed in recent months. American companies have
raised about $1 trillion in U.S. debt markets since March,
according to the Federal Reserve Bank of New York.
The Fed has been buying corporate bonds for several months in an
effort to keep bond markets open and stop a potential wave of
bankruptcies. It started by purchasing investment grade-rated debt
and later added some junk or high-yield bonds, among other measures
it employed, such as lowering interest rates to near zero.
Among the companies selling bonds was Chevron Corp. The oil
producer's net debt went up by $5.5 billion in the first quarter
and $1.7 billion in the second quarter, even though it has a $9.75
billion revolving credit facility. The company has cut its plans
for capital expenditures for 2020 by $4 billion, following the
example set by many other businesses, which slashed investment
budgets. Chevron booked a more than $8 billion loss in the second
quarter.
Coca-Cola Co., the Atlanta-based beverage maker, sold a total of
$11.5 billion in debt in March and April. During that time,
Coca-Cola had about $8.8 billion in untapped credit lines,
according to a spokesman. The company declined to comment
further.
Over 40% of companies that issued bonds between March and the
end of June didn't draw down existing credit lines, while close to
60% used bond proceeds to pay back credit lines, the study
said.
Kraft Heinz Co., the consumer-goods giant, sold $3.5 billion in
bonds in May and used the proceeds to retire older debt, according
to a spokesman. The company drew down one of its credit facilities
in March, but in June paid back its revolver in full, the spokesman
added.
General Electric Co. issued $13.5 billion in debt in the second
quarter, using the proceeds to repay $10.5 billion in shorter-dated
debt. It also refinanced a $15 billion credit facility, which
remained unused throughout the quarter.
For companies, selling bonds often was cheaper than drawing down
credit lines and provided them with longer-term funds compared with
bank loans, the researchers at Columbia Business School found. "The
cost of funds for bonds might have fallen disproportionately
relative to loans, with many issuers borrowing at historically low
rates," the study said. Preventing large credit-line drawdowns can
help weaker companies preserve those facilities for longer and also
reduce balance sheet constraints for banks, the study said.
The use of bond proceeds by speculative-grade companies has
evolved since the second quarter, said Evan Friedman, head of
covenant research at Moody's Investors Service Inc., a ratings
company. Although finance chiefs first stored cash on balance
sheets, they then turned to paying down credit lines and retiring
older, more expensive debt.
Companies in the high-yield space are now beginning to spend
bond proceeds on leveraged buyouts and mergers and acquisitions, he
added.
It will take time, though, before companies commit to new,
large-scale investments, said Christina Padgett, head of leveraged
finance research at Moody's.
"There is a fair amount of uncertainty, which needs to dissipate
before you see more investments from companies," Ms. Padgett said,
pointing to the lack of clarity around the pace of the economic
recovery. "The most important thing you can have in this situation
is liquidity."
The Fed declined to comment on the findings of the study.
Write to Nina Trentmann at Nina.Trentmann@wsj.com
(END) Dow Jones Newswires
October 28, 2020 05:44 ET (09:44 GMT)
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