Companies can be safer than countries
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.