Md. firms go slow on debt But other companies are refinancing with long-term low yields

Treasuries lead rates

January 18, 1998|By William Patalon III | William Patalon III,SUN STAFF

Even with long-term bond yields near multiyear lows, Maryland companies are taking a wait-and-see stance toward the corporate debt market.

Yields on the benchmark 30-year Treasury bond have touched historic lows in recent weeks, leading the rates on long-term corporate bonds lower. That's prompting many U.S. companies to refinance higher-interest bonds, or to issue debt outright at the lower rates.

"Companies are taking advantage of the opportunity," said Diane Vazza, head of fixed-income research for Standard & Poor's Inc. in New York City. "I expect to see a lot more refinancings later this year."

Companies prefer to issue debt when rates are low, because they incur lower interest costs, meaning more of the money they take in through sales can flow to the bottom line. Slashing interest payments is also the main incentive for refinancing older bonds that carry higher "coupons" or stated interest rates.

Conversely, at a given level of interest rates, investors show their preference for bonds with higher coupons by bidding the prices of those bonds higher. That's part of the reason bond prices move opposite to interest rates: rising when rates fall and falling when rates rise.

Major companies such as Sears, Roebuck and Co., TRW Inc. and DuPont have all issued debt in recent weeks, most of it at rates of roughly 6.5 percent to 6.75 percent, said Joe Sullivan, a senior vice president and manager of the fixed income desk for Legg Mason Inc. Those rates tend to be about three-quarters of a percentage point higher than Treasury bonds of the same life span or "maturity."

That difference between Treasury bond rates and corporate debt rates -- known in bond parlance as the "spread" -- has narrowed recently, meaning companies can issue investment-grade debt at an interest rate not too far above the rates paid on Treasury bonds. That narrower spread is sparking more companies to issue high-grade investment debt, S&P's Vazza said.

The market for lower-grade "junk" bonds -- which carry much higher interest rates -- was already brisk last year and shows no sign of ebbing, she said.

A look at New York-based Travelers Group Inc., parent of Baltimore's Commercial Credit Co., is an example of the high-grade, lower-interest debt financing. Travelers on Jan. 6 issued $300 million in debt with a coupon of 6.625 percent because its financial advisers "felt rates were extremely attractive," said Mary McDermott, the company's senior vice president of corporate communications.

Commercial Credit last week filed documents with the Securities and Exchange Commission announcing plans to issue as much as $2.3 billion in debt. However, it's fortuitous -- but coincidental -- that this bond issue is coming at a time of low rates, she said.

"They're in the market all the time. They're a lending company" and use the money to finance their lending operations, McDermott said.

Maryland companies are playing it cool.

Some, such as McCormick and Co. Inc., have already pared debt and no longer have a lot of high-coupon debt that needs to be retired. In August 1996, for instance, McCormick sold a business for about $230 million in cold cash.

"We used it to pay down a chunk of debt" -- including $50 million in bonds that carried an interest rate of 11.68 percent, said Christopher J. Kurtzman, McCormick's vice president and treasurer. "Overall, we're comfortable with our current debt level. We don't need to go to the market for additional financing."

Other companies, such as Black & Decker Corp., are watching to see if interest rates might go lower still.

"We have been following rates in anticipation of a reduction in the long-term rate for more than the past six months," said Mark Rothleitner, the company's vice president and treasurer. "We are not contemplating any near-term moves -- in the next few weeks or months. We are certainly interested though, and if this looks to be a trough [low]" the company could decide to make adjustments.

Other companies, such as Bethlehem Steel Co., are playing it cagey.

"That's a decision made by our board of directors based on attained results," said spokesman Gary Graham. "And the board doesn't meet until later this month."

Pub Date: 1/18/98

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