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CFOs Using Bond Proceeds to Pay Down Credit Lines, Debt

From WSJ: Many companies in recent months raised billions of dollars in new debt in the bond market, taking advantage of low funding costs and high investor demand.

Finance chiefs used the additional capital to bolster their companies’ balance sheet, pay down credit lines or replace older debt following interventions by the Federal Reserve to stabilize financial markets. Most didn’t, however, use the funds to invest in their businesses, according to a recent study of about 9,500 bond sales by Columbia Business School.

“We find that a lot of issuers issue earlier in their cash cycle than usual, are in sectors that are not the most affected by Covid [and] use the proceeds to hoard cash or repay debt, not invest in their operations,” said Olivier Darmouni, an associate professor for finance and economics at Columbia Business School and one of the authors of the study.

As a result, the bond market recovery between March and the end of June—the period the researchers analyzed—is unlikely to result in a “V-shaped” recovery in the broader economy, the study said. U.S. economic growth has contracted sharply since the coronavirus pandemic took off in the spring, and the pace of recovery has slowed in recent months. American companies have raised about $1 trillion in U.S. debt markets since March, according to the Federal Reserve Bank of New York.

The Fed has been buying corporate bonds for several months in an effort to keep bond markets open and stop a potential wave of bankruptcies. It started by purchasing investment grade-rated debt and later added some junk or high-yield bonds, among other measures it employed, such as lowering interest rates to near zero.

Among the companies selling bonds was Chevron Corp. The oil producer’s net debt went up by $5.5 billion in the first quarter and $1.7 billion in the second quarter, even though it has a $9.75 billion revolving credit facility. The company has cut its plans for capital expenditures for 2020 by $4 billion, following the example set by many other businesses, which slashed investment budgets. Chevron booked a more than $8 billion loss in the second quarter.

Coca-Cola Co. , the Atlanta-based beverage maker, sold a total of $11.5 billion in debt in March and April. During that time, Coca-Cola had about $8.8 billion in untapped credit lines, according to a spokesman. The company declined to comment further.

Over 40% of companies that issued bonds between March and the end of June didn’t draw down existing credit lines, while close to 60% used bond proceeds to pay back credit lines, the study said.

Kraft Heinz Co. , the consumer-goods giant, sold $3.5 billion in bonds in May and used the proceeds to retire older debt, according to a spokesman. The company drew down one of its credit facilities in March, but in June paid back its revolver in full, the spokesman added.

General Electric Co. issued $13.5 billion in debt in the second quarter, using the proceeds to repay $10.5 billion in shorter-dated debt. It also refinanced a $15 billion credit facility, which remained unused throughout the quarter.

For companies, selling bonds often was cheaper than drawing down credit lines and provided them with longer-term funds compared with bank loans, the researchers at Columbia Business School found. “The cost of funds for bonds might have fallen disproportionately relative to loans, with many issuers borrowing at historically low rates,” the study said. Preventing large credit-line drawdowns can help weaker companies preserve those facilities for longer and also reduce balance sheet constraints for banks, the study said.

The use of bond proceeds by speculative-grade companies has evolved since the second quarter, said Evan Friedman, head of covenant research at Moody’s Investors Service Inc., a ratings company. Although finance chiefs first stored cash on balance sheets, they then turned to paying down credit lines and retiring older, more expensive debt.

Companies in the high-yield space are now beginning to spend bond proceeds on leveraged buyouts and mergers and acquisitions, he added.

It will take time, though, before companies commit to new, large-scale investments, said Christina Padgett, head of leveraged finance research at Moody’s.

“There is a fair amount of uncertainty, which needs to dissipate before you see more investments from companies,” Ms. Padgett said, pointing to the lack of clarity around the pace of the economic recovery. “The most important thing you can have in this situation is liquidity.”

The Fed declined to comment on the findings of the study.

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