Rising interest rates not a major concern for CFOs of major U.S. corporations


Many CFOs have done their homework.

They refinanced some of their companies’ debt maturities and locked in cheap rates, making them less exposed to rising interest rates and higher financing costs.

Executives of large American companies, including General Motors Co.

XPO Logistics Inc.

and Levi Strauss & Co., said they weren’t too concerned about tightening monetary policy, given that interest rates are expected to rise from low levels.

The Federal Reserve, which cut rates to near zero at the start of the coronavirus pandemic in 2020, is expected to start raising rates in March to curb soaring inflation.

In 2020 and 2021, companies have been filling up on cash, cushioning their balance sheets against the impact of the pandemic and taking advantage of low funding costs. High-quality S&P 500 companies sold $634.45 billion in bonds and $726.67 billion in syndicated loans in 2021, compared to $932.28 billion in bonds and $479.77 billion in ready a year earlier, according to Dealogic, a data provider.

“Interest rates are coming off a historically low base and given the low cost of capital and liquidity available in the market, it is not yet time to worry,” said Jim Shepard, head of markets. investment grade debt capital at Mizuho Americas. , a subsidiary of the Japanese investment bank. “The market is returning to more normal conditions.”

Tapestry Inc.,

the New York-based owner of luxury fashion brands Coach, Kate Spade and Stuart Weitzman sold $500 million of debt last year that will mature in 2032, at a coupon rate of 3.05%, to partially redeem two existing bonds with coupon rates above 4%. “If you look at where interest rates are going, I’m glad we’ve gotten ahead,” said Scott Roe, the company’s chief financial officer, referring to the impending increase in funding costs.

Tapestry expects to save tens of millions of dollars in interest payments from the refinancing, Roe said. The company’s interest expense in the last quarter was $16 million, compared to $19 million in the prior year period.

Sysco Corp.

, a food retailer, raised new debt in December, in part to buy back bonds with higher coupon rates of 3.55% and 5.65% that it took on in 2020. “We had borrowed about 4 billions of dollars at the start of the Covid crisis, not knowing what was going to happen,” said chief financial officer Aaron Alt. “We lowered the interest rate and removed a major tower that was watching us in fiscal year 2025,” Mr. Alt said. The new debt has coupon rates of 2.45% and 3.15%, according to a regulatory filing.

Jeans maker Levi’s refinanced a $500 million bond last year. “In an environment where interest rates are expected to rise, it’s good to have a low fixed interest rate,” Chief Financial Officer Harmit Singh said.

Prologis Inc.,

a San Francisco-based REIT, has at least 10 years remaining on all of its debt, Treasurer Tim Arndt said. “We’ve been very keen to stay in debt for as long as possible,” Arndt said, referring to the company’s efforts to secure lower rates.

Harmit Singh, chief financial officer of Levis Strauss & Co.


Photo:

David Paul Morris/Bloomberg News

Rising interest rates will still impact corporate interest expense, as there is approximately $620 billion of investment grade rated debt maturing in 2022 and approximately $770 billion maturing in 2023, according to Deutsche Bank..

“More [investment-grade companies] still have maturities to refinance and investments to fund, so rising rates will still impact earnings,” said Marc Fratepietro, global co-head of investment-grade debt capital markets business at the German bank. “It’s a manageable impact for the most part, but still an impact,” Fratepietro said.

Quoted Inc.,

which owns CoverGirl and other cosmetics brands, plans to repay certain bonds in April, before they mature in 2023, chief financial officer Laurent Mercier said. “With the refinancings we have done over the past 10 months and the extension of maturities to 2025 and beyond, we have a much stronger balance sheet and higher interest rates are not a concern for us,” said Mr. Mercier.

Logistics company XPO holds about $1.15 billion in bonds redeemable in early May, ahead of their maturity date, chief financial officer Ravi Tulsyan said. There would be a small fee associated with paying off the debt, but it could be worth it, Tulsyan said. “It all depends on market conditions if we decide to refund,” he said. The company is targeting net debt of $2.8 billion, down from the $3.31 billion it held at the end of December.

Companies would also have to take on new debt to pay for mergers and acquisitions. Emerson Electric Co.

announced in October that it would merge its industrial software business with Aspen Technology,

in a deal valued at around $11 billion. Some of those funds will come from recently raised debt, Chief Financial Officer Frank Dellaquila said. “We went to the debt capital markets in December to borrow $3 billion,” Dellaquila said, adding that the company had paid less than 2.5% average interest for the new debt.

Rising interest rates not a major concern for CFOs of major U.S. corporations

Devina Rankin, CFO of Waste Management.


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WASTE MANAGEMENT

Some companies have locked in at least a portion of their future coupon rates by entering into pre-issue hedges. Such contracts can give executives “protection for quarters or even years,” said Mr. Arndt of Prologis. The company is evaluating its options for additional contracts, he said.

Whether companies have done enough to prepare for Fed rate hikes will only become clear in the months ahead. “What you’ll see is the Fed doing this dance with the markets,” said Beth Hammack, co-head of the Goldman Sachs group. Inc.

global finance group, adding that the central bank will continue to adjust its rhetoric. “It’s a delicate balance,” Ms. Hammack said.

Waste Management Inc.,

a Houston-based waste company, has pending refinances but will not take action yet. “We won’t do anything proactively to get ahead of rate hikes,” said Devina Rankin, the company’s chief financial officer. Waste Management’s average cost of borrowing is less than 3%, she said.

Yet finance chiefs also see the positive effects that higher rates can have. They are “a good middle ground for lower inflation,” said GM chief financial officer Paul Jacobson. The company’s auto arm has $500 million coming this year, followed by $2.8 billion in 2023, but hasn’t decided if or when it will refinance. “All options are on the table,” Mr. Jacobson said.

Some believe that rising inflation means companies are forced to raise prices. But as the WSJ’s Dion Rabouin explains, it actually works the other way around: businesses are actually driving inflation, and the data shows that they have been and will continue to drive up prices for a while. time. Illustration: Elisabeth Smelov

Write to Nina Trentmann at [email protected]

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