London-based refiner and plastics producer LyondellBasell (NYSE:LYB) announced that it had closed an offering of three tranches of debt totaling $2 billion. This likely wasn't part of the company's plan going into this fiscal year. The price of oil and the coronavirus may have caused the company to raise more debt in order to survive the bad weather.
What it sold, and how it'll use the money
The company issued three sets of bonds totaling $2 billion, for which it expects to keep $1.974 billion. The other $26 million goes to the firms helping it raise the cash as underwriting and registration fees.
The debt offering was composed of three different bonds with maturity dates between five and 30 years into the future. The weighted interest rate of the bonds is 3.7% . According to Lyondell, the funds raised through the bond offering will be used for general corporate purposes, to buy short-term securities, and to increase liquidity. The semiannual interest payments accompanying these bonds will be $36.6 million.
With this offering, the firm's debt burden is forecast to increase to $15 billion. This brings the company's annual undiscounted interest expense to around $540 million. The company has no bonds coming up for maturity in 2020, so this number represents only interest payments and no principle.
Was this planned?
Companies, depending on size, have different debt options available to them usually used for different reasons. Most companies have a revolving debt agreement to take out short-term debt to cover immediate bills. If a company is expanding and needs to cover a huge one-time bill, it will issue bonds and use the proceeds of that issue in order to make the planned capital investment.
For companies with good credit ratings, it is often much cheaper to fund large capital expansions with debt. This is in lieu of using cash, which may have a better place in a shareholder's wallet rather than being used for capital expansion.
Prior to 2019, Lyondell's long-term debt issuance was either low or nonexistent. In each of the three years prior, Lyondell issued $0, $990 million, and $812 million in 2018, 2017, and 2016, respectively. Yet the company still managed to make $2.1 billion, $1.5 billion, and $2.2 billion in capital investments for each of the years, respectively. 2018 even had an acquisition to the tune of $1.8 billion.
This massive, long-dated debt raise Lyondell just closed was likely not part of its original plans for this fiscal year. According to the company's annual report, the forecasted capex for 2020 was $2.4 billion.
To put this into perspective, ahead of 2019 Lyondell announced a capex spending goal of around $2.8 billion. We all know that 2019 turned out to be a relatively smooth year for heavy industrial companies. Lyondell ended up making $2.7 billion in capital investments for the year, for which the company took out a whopping $5 billion in long-term debt and $2.5 billion in short-term debt.
Of the funds it borrowed in 2019, Lyondell allocated $3 billion to paying back previously issued long-term debt, and $2 billion to repaying short-term debt. An additional $5.2 billion went to repurchasing shares and the common stock dividend. The company was likely planning on using the capital it raised in 2019 for the capital investments it had planned in 2020, seeing how those numbers are so massive.
How can this come back to bite shareholders
Some people may believe the company is being opportunistic with this debt raise, because Lyondell may not be able to borrow at interest rates this low in the future. Others may think this was a hasty debt raise that wasn't part of the company's capital spending forecast for 2020.
Each individual investor has their own tolerance for a company's debt burden. If $15 billion worth of debt is acceptable for some shareholders, they may continue to hold the stock through all of this.
But investors should be cautious: This debt raise was not earmarked for any particular capex project. Also, a $500 million interest expense burden for the foreseeable future may also make the company's risk too great for some investors. They may want to know how much of this debt raise is meant specifically for capital expenditures, and how much of it is just to keep the lights on at Lyondell.