The Federal Reserve's zero-interest-rate policy has crushed millions of savers who rely on dependable income from their investments to cover basic living expenses. But for many struggling companies, low rates have provided a lifeline without which they would have been stuck paying much higher levels of interest expense, threatening not only their profitability but their very survival.
Which companies have fared the best?
Up and down the credit spectrum, corporations have raised the amount of debt they've issued at extremely rapid rates. Corporate debt issued by nonfinancial companies rose at a 10.7% annualized rate in the fourth quarter of 2012, according to figures compiled by the Federal Reserve, with more than $225 billion in debt issued just in that quarter alone. That's the fastest debt growth of any group except for the federal government itself, and far outpaced the 6.6% rate of increase in household consumer credit, bringing total corporate debt outstanding to $8.66 trillion.
But arguably, companies with the weakest credit ratings that issue high-yield or "junk bond" debt have benefited the most from low rates. Spreads between high-quality Treasuries and junk-rated corporate bonds are at their lowest levels since before the financial crisis, and during 2012, high-yield debt issuance rose to more than $325 billion, up $100 billion from 2011 levels.
Take a look at some of the companies that have taken advantage of these low rates in the past year:
- CVR Energy (NYSE:CVI) offered $500 million in 10-year bonds back in October, paying a coupon of 6.5%. With the company having planned to use the money to buy existing debt paying 9%, the 2.5-percentage-point difference could save CVR Energy more than $7.5 million annually.
- Just a week ago, CenturyLink (NYSE:CTL) priced a $1 billion offering of seven-year notes at 5.625%, as it plans to use part of the proceeds to pay down a credit facility. Even after having cut its dividend by about 25% in February, CenturyLink was still able to turn to the credit markets and get a strong reception from investors.
- Late last year, independent oil and gas company Halcon Resources (NYSE:HK) turned to the junk bond market to help finance its $1.45 billion acquisition of Bakken energy assets, raising $750 million and paying 8.875% to cover the cash portion of the part-cash, part-stock deal. As attractive as that rate may seem in light of the huge potential in the Bakken shale play, Halcon remains a highly speculative company that has greatly ramped up both its assets and liabilities in recent years.
- Vantage Drilling (UNKNOWN:VTG.DL) subsidiary Offshore Group borrowed $1.15 billion in seven-year notes in October, paying 7.5%, and took out a new $500 million term-loan facility in order to help retire $1 billion in outstanding 11.5% notes. Even with the higher outstanding balance, the 4-percentage-point savings should equate to lower annual interest costs of nearly $300 million.
- At around the same time, HCA Holdings (NYSE:HCA) also tapped the high-yield credit markets for a total of $2.5 billion in 10-and-a-half-year financing, with its secured debt paying 4.75% and unsecured debt fetching 5.875%, part of which went toward a $2.50-per-share special dividend in November. It then issued another $1 billion in December at 6.25%, which it used to pay a second special dividend of $2 per share in advance of the fiscal-cliff increase in dividend rates.
What might have been
Admittedly, not all of these stocks have taken off. CenturyLink plunged after its dividend cut, and neither Halcon nor Vantage have seen anything close to the gains they'll realize if their respective ventures pay off.
But regardless of their share-price performance, investors in these companies owe a huge debt of gratitude to the Fed. Without the Fed's low-rate policies, these companies and hundreds of others like them wouldn't be enjoying the low financing costs that have given them so much more flexibility than they had during the financial crisis. Even after rates start to rise, companies that took the opportunity to borrow on the cheap will continue reaping the benefits of their fortune for years to come.