Companies can be safer than countries

February 16, 2010

It used to be that when the going got tough, investors fled into debt issued by sovereign governments whose default was unthinkable. This year’s Greek tragedy is changing that perception, and the debt of stable multinational companies like Kraft Foods, Berkshire Hathaway¬† and arguably Anheuser-Busch InBev¬† has become a safe haven substitute.

U.S. government bonds continue to be the ultimate refuge, but ballooning budget deficits have made investors rest a little less easy, especially with yields still bouncing around historic lows. In Europe, the uneasiness is especially pronounced with the possibility of one or more sovereign defaults impossible to ignore. According to Fitch Ratings, fixed income investors are much more worried about sovereign debt than bonds sold by highly-rated companies.

If recent debt offerings are any indication, this growing wariness of government debt should make it easier for big corporations that are well-positioned to weather economic downturns to find willing buyers of their debt.

Kraft, a household name the world over, and Berkshire, the conservative group run by investing legend Warren Buffett, managed between them to sell $17.5 billion of bonds on Feb. 4, a day global financial markets swooned on concerns about debt-laden Greece, Spain and Portugal.

Since then, the bonds have gone up in value as the risk premium priced into their yields has fallen. The risk premium on Kraft’s bonds maturing in 10 years’ time has dropped around 16 percent since the bonds were sold, while that on Berkshire bonds maturing February 2013 has tumbled 23 percent. The plan by brewer AB InBev to refinance some $13 billion of loans, reported by Reuters, may tap into this same kind of calculus.

But the strength of the Kraft and Berkshire issues stands out. The overall market for investment-grade corporate debt has actually weakened since mid-January. That’s because not all companies are safer than countries. Not every company has Berkshire’s conservatism or Kraft’s portfolio of businesses selling food and other relatively recession-proof staples.

For those that do, though, it may well pay investors to favor them — even after sovereign worries have subsided. It’s easy to see how big budget deficits could undermine some governments’ credit for years after economic recovery sets in. Investors wanting to sleep well at night could be better served seeking out the safest corporate harbors.


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Such as GM? :-)etc

Posted by The1eyedman | Report as abusive

Ok, Agnes, so investors have more confidence in the private sector, that is good news ! The balance can therefore only be restored through Public Private Partnerships or rate arbitrage and interest rate parities.

Look, I don’t really care, whichever way, and without detracting from your well-provoked article, the problem lays/lies with Sharia banking versus Infidel banking.

To me the common ground is not Houmous, Black gold, dollars, or wars, but cancer research. Navel and microscope gazing is not good enough anymore, we need results, maybe this way the Crusaders and the Muslims can combat these silent killers together, i.e. malignant core systems…

Posted by Ghandiolfini | Report as abusive

…or would this constitute fatwa shopping ?

Posted by Ghandiolfini | Report as abusive

So who cares about the root cause? The fundamentals of credit still apply. I don’t want to change the world, just keep on making money. The only reason Treasuries are still a refuge is the sheer mass of the market and the lack of violent political upheaval in the US, but even so, T-Bill yields are just beginning to move upward. After a couple more years of Obama, not even solid US corporations will be safe havens, since Congress and the Administration will start a tax frenzy not unlike vampires in a blood bank.

True, there is a Congressional Election in November 2011, but the outcome is still uncertain, and politicians as a species have no balls. My bet is that the current Administration will just let the US begin to inflate its way out of unsustainable debt. There will be no EU, IMF or other lender of last resort to come riding in on the white horse when Social Security, Medicare, and Medicaid hit the wall.

Just as it has been since time immemorial, tangible value, technological expertise, and managerial skill will rule. Governments come and go. When they stay around for too long, they get rotten. Have you noticed the foul smell coming from Washington, DC ??

Posted by LogNormal | Report as abusive