NEW YORK CIT Group Inc. and WorldCom Inc. joined a spate of companies selling fixed-rate bonds this week, evidence that a growing number of treasurers are betting interest will rise later this year.
Bond sales by U.S. companies have doubled to $233 billion during the first four months of 2001, with companies increasingly opting for fixed-rate debt. Sales of variable-rate securities have declined by more than half compared with the same period a year ago, to $5.5 billion, according to Moodys Investor Services.
Fixed-rate debt has become more attractive as the prospect for a rebound in economic growth later this year has bumped up borrowing costs. Benchmark 10-year borrowing rates for companies with AA credit ratings have risen to 5.97% today from 5.67% on March 22. The rate had fallen from 7.85% last May as the Federal Reserve cut interest rates.
Rates have come in nicely, said Glenn Votek, treasurer at CIT Group, a finance company which sold $1.25 billion of three-year notes and 750 million euros of four-year debt yesterday. The coupon is very attractive relative to our overall average cost of debt, he said.
For CIT, the decision to sell fixed-rate debt was unusual. Prior to yesterdays offering, 31 of the 34 bonds the New York-based company has outstanding were issued as floating-rate securities.
CIT is being bought by Tyco International Ltd for about $9.6 billion. The transaction is expected to be completed June 1.
U.S. companies have not sold a floating-rate bond since the day after the Fed last cut its benchmark discount rate on April 18 to 4.5%, according to Bloomberg. Floating-rate bonds made up 2.4% of corporate debt sold from January to April, down from 12.8% in the same period last year, according to Moodys.
Companies have been issuing longer-term, fixed-rate bonds to pay off shorter-term, variable-rate debt, said John Puchalla, an economist at Moodys. If the economy picks up over the next year and short-term rates start to rise again, that could expose companies to refinancing risk.
Selling fixed-rate debt allowed CIT to lock in an attractive borrowing rate of 5.63% on its dollar-denominated bonds, or 87 basis points less than the companys 5.65% average cost of debt, Mr. Votek said. As a result, the company saved $8,700 per $1 million it borrowed yesterday compared with its average debt cost, he said.