CFOs engage in new battle: for the lowest coupon

By Timothy Sifert
November 8, 2010

By Timothy Sifert

There’s a new game in corporate America and the finance boss who pays the lowest yield on his firm’s latest debt wins. On the leader board are CFOs from hallowed borrowers like Wal-Mart, Coca Cola and Johnson & Johnson. But being the envy of your peers may have some drawbacks.

Super-low interest rates have made it a CFO’s world. Balance sheet repair is easier than ever and debt investors are plenty and eager. Pity the poor CEO: sluggish GDP growth and unreliable equity markets have hamstrung M&A and organic expansion. Yet despite this enforced boardroom conservatism, CFOs are still raising record amounts of debt capital. Uses of proceeds vary but a main driver is simply its low cost. Perhaps equally important are bragging rights among other corporate bean counters.

Coke’s financial chief Gary Fayard must have had Wal-Mart in mind on Thursday when the soda giant priced a three-year bond with a 0.75 percent coupon, tying the record low coupon for a three-year note set by the mega-retailer in October. The week before Colgate Palmolive’s CFO Stephen Patrick likely had tabs on Wal-Mart, too. The toothpaste group priced a five-year bond at 1.375 percent. The two of them almost make Wal-Mart — which borrowed at 1.5 percent — look like it’s overpaying.

That may be fitting. After all, Wal-Mart chief financial officer Thomas Schoewe was the reigning envy of the corporate world this summer. In July his company priced the lowest coupons ever on 10-year and 30-year bonds. Wal-Mart took over the top spot that J&J held since May 2003, according to Thomson Reuters data.

J&J’s number cruncher-in-chief Dominic Caruso, struck back in August, regaining the lead in 10s and 30s. The issuer priced a 10-year note at 2.95 percent, a whopping 70 basis points tighter than Wal-Mart’s. Colgate has since matched J&J on the 10-year note. And San Diego Gas & Electric, Southern California Edison and Microsoft have tied the 4.50 percent record coupon for a 30-year bond set by J&J in August.

Of course, with all these piles of cheap cash there are some drawbacks. For one, CEOs may feel inclined to spend it on frivolous or value-destructive deals. And as some of the most active and savviest bond investors, CFOs must also know they aren’t doing themselves any favors. The lower they push coupons — with the help of the Fed — the lower the expected returns on the pension funds they, themselves, must manage.

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