A Stampede For Cheaper MoneyLarry Light and Leah Nathans Spiro
TriMas Corp. is starting 1992 off with a new, slimmer balance sheet. With interest rates at a 28-year low, the Ann Arbor (Mich.) maker of such gritty gear as trailer hitches got its bankers on the phone. And just like that, the deep-in-debt company refinanced $88 million of $128 million in debt from a 1988 spin-off. By cutting the rate it pays by two whole percentage points, and by retiring the remaining $40 million debt balance, TriMas eased its yearly interest payments by a welcome $5.4 million. Now, the company is set up nicely for an expansion spree in a market chockablock with recession-style bargains.
Like the millions of homeowners across the U.S. who are putting cash in their pockets by refinancing mortgages at lower rates, Corporate America is enjoying a refreshing change in the capital markets. From AT&T to DuPont to HCA, companies big and not-so-big are rushing to cut new deals with lenders or raise fresh dough in a surging stock market. In 1990, corporate debt peaked at 46.8% of total capital, saddling U.S. businesses with a superhigh interest tab that cut into their ability to spend on new products, new markets, and other operating initiatives. But this year, the debt-to-capital figure should inch down to 46% and keep easing from there (chart).
These days, cheap capital doesn't end with corporate IOUs. Raising money in the stock market is a sweet deal, too. After a four-year drought, Wall Street underwriters are flush with equity deals. Issuers have been lured to market by a surprising new appetite for equities among investors, who are fleeing the rock-bottom rates paid on bank certificates and money funds. The torrid 1991 pace for initial offerings--triple 1990's--should continue this year, analysts say.
NO DICE. So does Dec. 20, the day the Federal Reserve slashed the discount rate by a full point to 3.5%, mark the end of the recession? Unfortunately not. This downturn is a stubborn beast: Witness the continuing layoffs, sour consumer confidence, and enduring, albeit lighter, debt burdens. And lower rates haven't yet changed life much for small companies. "They could be charging zero percent interest," says Jim Weidman, a National Federation of Independent Businesses spokesman, "and banks still wouldn't lend to small businesses."
But for many companies, lower rates and the parallel bull market in stocks are making business a lot easier. Even those that normally sit out credit market rallies can't resist jumping in now: American Telephone & Telegraph Co. and DuPont both offered debentures gn Jan. 7. For smaller companies, the markets are making expansion possible again. Medical Care International Inc., the nation's largest operator of outpatient surgical centers, is using $115 million in debentures it issued to add as many as 10 centers this year to its current 80. Dallas-based Medical Care, which must pay up to 9.9% on other bonds, is shelling out just 6.75% for these. Says CEO Donald E. Steen: "I can't imagine a better market."
Then there's Fleet Call Inc. of Rutherford, N.J. The radio dispatch operator is eyeing a $200 million stock sale to fuel its move into mobile phones, where it will take on the likes of McCaw Broadcasting Co. and Lin Broadcasting Inc.
For large, well-established companies, the new environment offers wonderful flexibility. A month ago, Walt Disney Co. was thinking about raising $220 million for its TV production unit via a newfangled investment vehicle dubbed ZEBRA, for zero-based rate adjustment security. This paid a modest 4% but allowed investors to share Disney's profits, once hoped-for hits like its new Dinosaurs move into syndication. Suddenly, two days before Christmas, Disney canceled the ZEBRA. Why? When it needs to, it can borrow from banks for less.
And big savings can be just a little legerdemain away for companies with high-interest debt to trade in. Polaroid Corp. wants to swap $150 million in notes paying 8.9% with ones at a maximum of 7.5%. Savings: between $1.5 million and $2 million annually.
STOCK OPTION. Polaroid's experience is a prime example of how debt-heavy companies got there--and of how they plan to dig out. In 1989, after borrowing big bucks to fend off a raider, the photo filmmaker was left with a debt load of 88% of capital. Now, from a current 51%, it aims to whittle debt down below 40% of total capital. Chief Financial Officer William J. O'Neill Jr. says Polaroid is looking forward to eventually expanding again. "We're on the phone with our investment bankers," he says.
Others figure the best way to get out of debt is by selling stock (table). HCA-Hospital Corp. of America intends to apply the $558 million it seeks in a U.S. public offering, plus stock sold overseas, to help trim some of its hellacious debt from a 1989 leveraged buyout.
Luckiest among debt-heavy companies are those with floating-rate debt--that is, with rates pegged to such benchmarks as the prime rate, which banks charge their most creditworthy customers, or the London interbank offered rate, used by banks dealing in U.S. currency held in Europe. RJR Nabisco Inc. pays just 0.62 points over LIBOR, now 4.4%. Result: an interest tab of only 5% on its $3.5 billion in bank loans. Compare that with the 12.3% RJR paid in 1989.
Low rates could even help U.S. exports. They hurt the dollar, since they make the greenback less attractive to foreigners. This makes American goods cheaper and more competitive overseas. That's what Convex Computer Corp. is counting on. With the dollar on the upswing in 1991, the Richardson (Tex.) computer maker saw international sales dip to 45% of sales from 54% in 1990. This year, says CEO Robert J. Paluck, Convex should regain the lost ground.
How long will this pleasant climate last? For equity capital, the outlook is sunny, provided that the economy recovers the way Wall Street expects by midyear. But a recovery could send rates higher. If so, this would make debt reduction a right-now thing. That's what Cleveland's Reliance Electric Co. figures, anyway. The motor maker is eyeing a refinancing of its $600 million in junk-bond debt, taken on in a 1986 LBO. Rates may not be this low a year from now, says Assistant Treasurer John D. Hutson, so "there's some urgency." Corporate America has got the word.
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