Category Archives: Interest

High(?) Yield Bonds

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Dennis McCarthy – (213) 222-8260 – dennismccarthy@ariesmgmt.com

New high yield bonds are now being issued at interest rates that don’t really qualify as high.

Forbes magazine reports that the 30-day average high yield new issue bond yield fell to 6.11% at the end of January.

If your company has debt outstanding in an amount of $100 million or more, your company should consider issuing high yield bonds at these historically low rates.

Many companies continue to borrow at short-term floating rates because those rates are amazingly low. Most likely, short-term floating rates won’t stay this low for 5 to 10 years, however. 

In contrast, today’s high yield bond rates present an opportunity to lock in low rates for a long period.

Also, short-term floating rate debt typically carries covenants that restrict a company. 

Again, in contrast, high yield bonds typically have very few covenants restricting the issuer. 

Please contact me to discuss raising high yield bonds or any capital market transaction.

Forbes article link: http://www.forbes.com/sites/spleverage/2013/01/22/high-yield-bond-yields-hit-record-low-6-11/

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Deal with a Slow Growth World

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Dennis McCarthy – (213) 222-8260 – dennis@monarchbayassociates.com

When I posted, “Living with no growth”, I suggested that we rethink some of our widely held assumptions, which are based on continued growth.

At that time, the most common response from viewers was denial, “no growth, not my world”.

And, to be fair, there’ll be pockets of growth, no doubt, but, in general, the global economy is slowing. There’s no denying it.

So, if you run a company facing this slow to no growth environment, how do you respond? 

Specifically, how do you deal with Wall Street when earnings growth is hard to come by?

The first response of many companies is to cut costs.  Many companies, however, are already running lean and mean so there’s not much room to cut costs any more, and some costs, for example, health and workers comp insurance, just keep rising.

The related response, raising prices is probably a non-starter in the face of today’s softening demand and increased competition.

So how do you keep Wall Street happy? Here are a couple more ideas.

One. Many public companies are initiating or increasing their stock buyback programs.

Last month, companies announced $45 billion in new or expanded stock buyback programs.

Two. Initiate or increase a dividend on your stock.  As I reported in my post “Offer Yield Securities – What Investors Want”, increasingly, investors look for current yield if there’s slow or no growth.  And you know, with today’s low interest rate environment it doesn’t take much to offer an attractive yield. 

Three.  Your company could increase its financial leverage.  Your company could raise debt to grow or buyback equity. Borrowing rates are at record lows so you may be able to put the money to work efficiently to make this move pay.

Four. Get economies of scale by combining with another synergistic company.

If you can acquire or merge with a company at a reasonable price, you may be able to give your bottom line a boost by eliminating duplicate costs.

So, the message is, once we recognize that our environment has changed, that global growth is slowing, we can focus on practical responses

I can help you to evaluate your options and take the best actions.  Contact me now.

 

Alternate Route

Alternate Route

Visual Interest Rate History

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On Youtube, next to my posts about interest rate risk such as “Behind the Headlines on Interest Rates” were a series of videos which visually chronicle the history of US Treasury interest rates along the maturity curve for the last 50 years with commentary by Dr. Donald R. van Deventer, founder of Kamakura Corporation. Displayed above is one of the videos entitled, “50 Years of Forward Rate Movements”.

In a great example of a picture is worth a thousand words, or in this case, 12,300 days of data, one can quickly sense (i) historical levels of benchmark US Treasury interest rates, (ii) the variations from the expected or classical term rate structure (which is more common than one would think), and (iii) the amazing volatility in benchmark US Treasury rates.

As my post “Behind the Headlines on Interest Rates” explains, there’s more to what a company pays in interest rates than just the benchmark US Treasury rates but this reveals the variability in those benchmarks themselves.

My thanks to Kamakura Corporation for creating these videos.  The company’s Youtube channel is www.youtube.com/user/kamakuracorporation and its website is www.kamakuraco.com.

Behind The Headlines On Interest Rates

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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

Offer Yield Securities – What Investors Want

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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

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