Companies Act on Rising Interest Rates; Pension Contributions, Trade, Borrowing for Deals All Are Affected

September 11, 2013, 8:15 p.m. ET

Companies Act on Rising Interest Rates

Pension Contributions, Trade, Borrowing for Deals All Are Affected



Interest rates for long-term business borrowing have shot up to the highest levels in two years. That’s pushing corporate executives to not only rethink their borrowing and refinancing strategies, but also to adjust pension contributions and overseas trade. Some may even accelerate plans for deals. While most experts say it is too early to see an increase in the number of mergers and acquisitions, which can take months to negotiate, rising rates were a driving factor in Verizon Communications Inc.’s VZ +0.11% recent agreement to buyVodafone Group VOD.LN +1.08% PLC’s stake in their joint U.S. wireless business. That is because fresh funds for acquisitions and other deals will only get more expensive as rates go higher. “Interest rates are presumably the real catalyst here,” said Craig Moffett, senior research analyst at Moffett Research, referring to Verizon.On Wednesday Verizon rushed to market with a record-setting $49 billion package of bonds to finance the deal with Vodafone. Jody Lurie, corporate credit analyst at Janney Capital Markets, said in a research note it made sense for Verizon to sell debt ahead of a Federal Reserve meeting next week. The central bank could decide to slow its stimulus policy, which would put more upward pressure on interest rates.

Rising rates, while still near historically low levels, can have upsides as well as downsides for companies

Ford Motor Co. F -0.06% warned investors last month that higher rates will drive up its interest expenses by $50 million this year. But on the flip side, Ford’s U.S. pension plan is experiencing a marked improvement. Ford chipped in $2 billion for its pension plan, but rising discount rates were the big reason the company has narrowed its $9.7 billion funding gap by about $4 billion this year.

Pensions get a big boost from higher rates, because companies use them to calculate the present-day value, known as the “discount rate,” of future obligations. It was 4.77% in August, up from 3.96% at the end of last year.

“We’re very encouraged by the progress we’re seeing,” said Bob Shanks, Ford’s chief financial officer.

This week, actuarial consulting firm Milliman Inc. reported that the obligations of the 100 largest corporate defined-benefit pension plans were 89.4% funded at the end of last month, up from 72% a year ago –an improvement of $351 billion primarily due to rising interest rates since the end of May.

After years of efforts to keep interest rates near zero to help the struggling economy, Federal Reserve Chairman Ben Bernanke in May telegraphed that the days of cheap and easy long-term credit were potentially numbered. As a result, yields on 10-year Treasury bonds—a benchmark used to set other interest rates—have shot up to 2.92% from 1.63% in four months.

A lot of companies have jumped at the chance to refinance high-interest bonds and other types of loans while the going is still good. So far this year, 54% of leveraged loans made to companies have been used to refinance debt, according to S&P Capital IQ’s Leveraged Commentary & Data unit. That’s up from 47% in the year-ago period.

Industrial equipment maker Rexnord Corp. borrowed $1.95 billion from the loan markets last month and used the money to redeem more-expensive high-yield bonds. The refinancing could save as much as $48 million in annual interest expenses, the company said.

“In the historical scheme of things, rates are still low, so companies are trying to lock it in now,” said Edward Nusbaum, chief executive of the auditing firm Grant Thornton International Ltd.

Even companies that haven’t waded into debt markets in years are jumping in now. Last week, Starbucks Corp. sold $750 million of bonds, its first bond sale in six years. The 10-year bonds carried interest of 3.85%, much lower than the 6.25% the coffee retailer paid on similar bonds it sold in 2007.

At the same time, however, higher rates are also affecting foreign-currency exchange rates in several countries, including India and Brazil. As investors shift their bond holdings to safer and higher-yielding U.S. government debt, the value of the dollar is strengthening against trading partners. And that is having ripple effects on multinational companies that trade, outsource or build abroad.

U.S. companies exporting to Brazil and Japan and India have been hurt by 13% to 25% declines in the value of the local currencies relative to the dollar. As prices of imported goods in those countries rise, that infects the economy with inflation.

The decline in the value of the rupee “is going to help me in the short term,” said Kenneth Judd, chief financial officer for Keste, a software company with 250 employees, 100 of whom are in India. “However, I still have got to hire people over there. I’ve got to pay people. I’m waiting for the inflation rate that’s going to hit India. My people are just demanding heavy increases in their salaries.”

Intel Corp.’s INTC -0.76% CFO Stacy Smith said he is also worried about the fall in the value of the rupee and said the impact on demand for the company’s computer chips “could be pretty significant over time,” especially if it lasts longer than six months.

“The first thing that happens is people suck it up in margins, so that protects you for some period of time,” he said, but over time distributors will have to raise prices or find cheaper products that consumers can afford.

In July, Wyndham Worldwide Corp. WYN +0.98% sold $226 million in investment-grade, asset-backed securities with a 2.28% coupon, almost 0.7 percentage point higher than it paid in March, when it raised $230 million.

“When we accessed the capital markets [in July], we were doing it at a time of uncertain and escalating rates, and we had some amusing conversations” because the deal was so fluid and rates were changing so dramatically, said Tom Conforti, Wyndham’s chief financial officer. “But then we agreed we had a moment of sanity and we said, ‘When we look back on this deal, we will consider this one of the best deals we’ve done.'”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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