Behind The Headlines On Interest Rates

 

The Federal Reserve announced that economic factors “are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”

This will, no doubt, influence interest rates through this period, but this is not the sole determinant of a company’s interest rate as noted in my post “Seems Smart Now“.

For example, the debt market for corporations, both large and small, is influenced by supply and demand factors in addition to the benchmark federal funds rate.  The predicted reduction in demand for corporate debt by collateralized loan obligation (CLO) funds suggests that companies may see higher new issue interest rates.  In contrast, any increase in demand by other lenders such as high yield bond and “relative value” investors may ease rates.

The recent post, “No Loan Left Behind“, by Randy Schwimmer of Churchill Middle Market Finance, now a unit of The Carlyle Group, describes these supply and demand forces at work on the larger size loan market (size above $100 million).

To support Randy’s view that high yield investors are supplying critical demand, this week one of my clients successfully priced its first high yield bond replacing other financing sources.

My message is that while Fed action gets the headlines, there are several other factors at work, behind the headlines, which influence a company’s debt rate.

Dennis McCarthy

(213) 222-8260

dennismccarthy@ariesmgmt.com

No Growth? Not Us!

A frequent response to my post “Living with No Growth” focused on the argument that the US will benefit from continued growth in Asia, particularly China, to escape a slow to no growth world.

While the optimist in me hopes this is true, the message I’m getting from reputable sources in China is that its economy is experiencing stresses which may result in a “harder landing” than had been hoped.  The benefit to the US, therefore, may be less than expected.

One of my sources on developments in China is Patrick Chovanec whose Bio and bloglink is below:

Patrick Chovanec (程致宇) is an associate professor at Tsinghua University’s School of Economics and Management in Beijing, China, where he teaches in the school’s International MBA Program.  His insights into Chinese business, economics, politics, and culture have been featured by international media including CNN, BBC, Time, Newsweek, Wall Street Journal, Financial Times, Bloomberg, New York Times, Washington Post, Forbes, Foreign Policy, The Atlantic, PBS, NPR, and Al Jazeera.  He is a regular guest commentator on Chinese Central Television (CCTV-9) and China Radio International (CRI), and serves as Chairman of the Public Policy Development Committee for the American Chamber of Commerce in China.

Blog: An American Perspective From China

Thank you.

Dennis McCarthy

dennismccarthy@ariesmgmt.com

213-222-8260

Short-term Debt Seems Smart Now

dennismccarthy@ariesmgmt.com

(213) 222-8260

With short-term interest rates at historically low levels, many small cap companies are funding all their capital needs with short-term debt.

Can you blame them?  Small cap companies are borrowing at 2 to 3% floating rates or a bit more if swapped to fixed rates.

Yes, it is a short maturity, one to three years, but the lenders will extend it when due.  They said they would.

 Yes, we all know that old maxim, fund long-term assets with long-term capital but companies are saving so much in interest by borrowing short-term.

What’s the risk, anyway? If rates start to rise, companies can refinance with long-term capital then.

I hear this a lot.  It worries me.  

Interest rates may rise unexpectedly and fast.  When the time comes to lock in long-term capital, there’ll likely be a rush to refinance.

First,  who lends for 5 to 10 years – insurance companies, specialty lenders, the public bond market?

There are limits to how much and how fast these markets can absorb new debt.

Second, what will happen to interest rates?  Spreads on corporate debt have already widened since this summer.  What do you think will happen to interest rates when there’s a rush to refinance?

I’ve been encouraging small cap companies to be prudent, to borrow some capital long-term.  Create a relationship with the long-term debt market now, before the rush.

In the rush to refinance, you’ll want your company to be the first in line because your company is already a known participant in the long-term debt market. 

Now, that’s a smart move.

Please contact me to discuss this or any of my posts. Thank you.

Offer Yield Securities – What Investors Want

dennismccarthy@ariesmgmt.com

(213) 222-8260

This is the second in a series of posts about how a company can best  respond to our current capital markets environment.

Frequently, our clients express their frustration that the equity market is so volatile now that investors seem reluctant to act.  Many investors are unsure whether they’ll get a positive return on their investment.

This has driven many to seek out securities with a yield, maybe interest on debt or a dividend on equity.

Seeing this, we’ve come up with a transaction which responds to investors’ current preferences.

We’ve advised companies to offer their common shareholders a new yield-oriented security in exchange for their common.

We’ve tailored the exchange offers to fit our client’s specific circumstances, there are a number of variations available.

The key is that our clients offer what is in great demand, a yield security, in exchange for what seems less in demand, plain common stock.

We’d be happy to discuss this idea with you to determine whether it works in your situation. 

Please call me or email me.  Thank you.

dennismccarthy@ariesmgmt.com

(213) 222-8260

Capitalmarketalerts.com

Living with No Growth

dennismccarthy@ariesmgmt.com

(213) 222-8260

Lately, I’ve been struggling with what it will mean to live in a world of slow to no growth.

First, I tried denial.   There can’t be a world without growth.

Pick up any company annual report or analyst research report, they always project growth.

It’s in our Wall Street DNA.

We need growth to cover our costs, to justify higher salaries, to reward our shareholders?

But, what if, as is now widely expected, we face a global slowdown for our near-term future?

How do we behave in a slow to no growth world?

We’re going to have to rethink many of our basic assumptions. Here are a couple which come to mind.

First, I think cost control will become more critical without revenue growth to bail us out.

Will this trigger a power shift in companies?  Will the path to become CEO now run through accounting?

Second, I think that, without growth, current cash flow is king.  There’ll be more skepticism about the promise of future cash flow.

Will this spark a rash of corporate acquisitions as large, cash-flowing companies gobble up companies with no or low cash flow?

On the financing front, with slow to no growth, will companies borrow more to get as much financial leverage as possible.

Or, will equity securities change?  Will we see more companies begin to pay dividends or do regular stock buybacks to pay a current return to their equity shareholders.

These are just a few ideas.  There are many more potential implications.

Please contact me to discuss the capital markets implications for your company.

My contact information is below. Thank you.

dennismccarthy@ariesmgmt.com

(213) 222-8260

Capitalmarketalerts.com

Slow Road Ahead

Living with slow to no growth

What now? Where can I get capital?

dennismccarthy@ariesmgmt.com

(213) 222-8260

Well, it’s the Fall of 2011, Wall Street has been highly volatile as fears of a new recession and disarray in the Eurozone dominate the news.

As I talk with clients and friends, the discussion always comes around to the question “now what?”  What if my company needs capital?  Where can I go?

First, there’s debt.

The debt markets are open for business.  Based on my experience, finance companies and banks are lending.  The public debt market is open too.

A borrower’s projections may get more “stress testing” now but interest rates are historically low.

Second, there’s asset sales

In part because debt is available, buyers are active. If your company needs to raise cash, you might consider selling a business.

I know companies who’ve raised cash in this manner.  They’ve gotten good prices for the businesses sold and are now deploying the money. 

Third, large cash-rich corporations may be a source of capital for your company. 

Sometimes these relationships take the form of direct equity investments into your company but many times they take the form of JVs, licenses, cash advances or even simple grants.

These deals work when the relationship benefits the large company’s business, even if indirectly. 

Lastly, don’t forget equity.

You may wish for higher prices when selling equity but you should also be pragmatic.  You should ask yourself “how critical is the having cash now?  What is the investment opportunity?  Does it justify the cost of raising equity now?”

Again, my name is Dennis McCarthy.  I’m happy to discuss funding options with you.  My contact information is below.