A Record-Low Bond Yield

Hurricane Sandy slowed the start to last week's U.S. corporate bond issues, but the week closed strong with $25 billion in new paper. The action included nearly $8.5 billion from borrowers based outside the U.S., several billion-dollar club members, and the first-ever five-year corporate issue with a yield less than 1%.

Last week's biggest borrower was Verizon (NYSE: VZ  ) with $4.5 billion spread over three-, five-, 10-, and 30-year paper. The money is being used to retire higher-yielding debt. Depending on the mix of existing paper retired and the premium paid to buy it, Verizon stands to save roughly $200 million per year in debt-servicing expense.

BP (NYSE: BP  ) subsidiary BP Capital tapped into $3 billion of new money with three-, five-, and 10-year issues. The money will go toward "working capital for BP or other companies in the BP Group and the repayment of existing borrowings of BP and its subsidiaries." For $3 billion, investors in the big energy company would probably like to see a little more detail.

Aetna (NYSE: AET  ) easily cleared the bar for the billion-dollar borrower's club with $2 billion spread over five-, 10-, and 30-year issues. The money will help pay for Aetna's acquisition of Coventry Health Care (NYSE: CVH  ) .

General Dynamics (NYSE: GD  ) opened fire on interest expenses with $2.4 billion of five-, 10-, and 30-year debt slated to redeem higher-rate paper. The defense contractor should see annual interest expenses drop by around $60 million depending on the specifics of the redemption deals.

The bond market entered Microsoft's (Nasdaq: MSFT  ) stellar credit rating into a spreadsheet and came up with a record-low yield for a five-year corporate issue. In addition to the five-year tranche at less than 1%, the Microsoft deal included 10- and 30-year paper for a total of $2.25 billion in new borrowing. In its press release, Microsoft said it intends to use the money for "general corporate purposes, which may include funding for working capital, capital expenditures, repurchases of stock, acquisitions and repayment of existing debt." With a 3%-plus dividend yield, Microsoft could actually improve its cash flow by borrowing money to repurchase its stock. One does wonder why a company with more than $60 billion in cash and short-term investments on the books needs to borrow money.

International borrowers continued to make up a significant piece of the corporate bond issues last week. One trend that didn't continue last week was a sizable amount of high-yield debt. There was only one junk deal -- a $300 million issue by Kazakhstan's railway. The markets were disrupted by the storm, no issues were recorded the first three days of the week, and The Wall Street Journal reported that Abbott Labs (NYSE: ABT  ) postponed a large bond offering.

Last week also reminded us that some things are much more important than the markets. My thoughts and prayers are with those affected by Sandy.

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Russ Krull has no positions in the stocks mentioned above. The Motley Fool owns shares of General Dynamics and Microsoft. Motley Fool newsletter services recommend Covidien Ltd. and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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