Corporate bond yields over the past four years have fallen to an average of 4.6% from 6.14% in the five years before Lehman Brothers Holdings Inc.’s demise, a savings equal to $15.4 million annually per every $1 billion borrowed. Businesses took advantage of the Fed’s largesse to lock in record low rates, extend maturities and raise cash by selling $5.16 trillion of bonds, data compiled by Bloomberg show.
“The stimulus was a huge saving grace in the economy overall,” said J. Michael Schlotman, the chief financial officer at Cincinnati-based Kroger Co., the grocery store operator that estimates it’s paying about $80 million less in interest than it would have pre-crisis. “It probably kept some businesses from failing because they were able to refinance their debt at lower interest payments.”
The combination of a near-zero rate policy and more than $3 trillion of bond purchases by the Fed since December 2008 means that the collective interest savings enjoyed by Apple, Verizon and more than 2,000 other corporate borrowers exceeds Switzerland’s $632 billion economy.
That’s money freed up to expand businesses and hire workers. Corporations boosted their capital expenditures to $699 billion in the three months ended June 30, about the most in a decade, and up 8.7% from the corresponding period last year, according to JPMorgan Chase & Co. Even the neediest companies have been able to obtain cash as the trailing 12-month U.S. speculative-grade default rate has plummeted to less than 3% from more than 13% back in 2009.
Drugstore chain Rite Aid Corp. and residential property firm Realogy Corp. are two of the 283 junk-rated borrowers identified in March 2009 by Moody’s Investors Service as being at the highest risk of default that have since sold bonds.
After plunging to 9.5 cents on the dollar in March 2009, Camp Hill, Pennsylvania-based Rite Aid’s $295 million of debentures due February 2027 have rebounded to 101.38 cents, as their yields fell to 7.53% from 80%.
While borrowing costs are starting to rise in anticipation that the Fed will say as soon as today it will start reducing stimulus measures, they’re still below pre-crisis levels and enticing borrowers. Verizon sold $49 billion of bonds last week in the biggest corporate offering on record.
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