CFOs use bond proceeds to pay off lines of credit and debt

In recent months, many companies have raised billions of dollars in new debt in the bond market, taking advantage of low funding costs and strong investor demand.

CFOs used the additional capital to strengthen their company’s balance sheet, repay credit lines or replace old debts following Federal Reserve interventions to stabilize financial markets. Most, however, did not use the funds to invest in their businesses, according to a recent study of approximately 9,500 bond sales by Columbia Business School.

“We are seeing that a lot of issuers are issuing earlier in their cash cycle than usual, are in sectors that are not the most affected by Covid [and] use the proceeds to accumulate money or pay off debt, not invest in their operations, ”said Olivier Darmouni, associate professor of finance and economics at Columbia Business School and one of the study’s authors .

As a result, the bond market rally between March and the end of June – the time period analyzed by researchers – is unlikely to result in a “V” recovery in the wider economy, according to the study. U.S. economic growth has contracted sharply since the coronavirus pandemic took off in the spring, and the pace of the recovery has slowed in recent months. US companies have raised about $ 1 trillion in US debt markets since March, according to the Federal Reserve Bank of New York.

The Fed has been buying corporate bonds for several months with the aim of keeping bond markets open and stopping a possible wave of bankruptcies. He started by buying investment grade debt securities, then added some garbage or high yield bonds, among other measures he used, such as lowering interest rates to near zero.

Among the companies selling bonds was

Chevron Corp.

The oil producer’s net debt increased by $ 5.5 billion in the first quarter and $ 1.7 billion in the second quarter, even though it has a revolving credit facility of $ 9.75 billion . The company has cut his plans for 2020 capital spending of $ 4 billion, like many other companies that have cut capital budgets. Chevron recorded a loss of more than $ 8 billion in the second quarter.

Coca Cola Co.

, the Atlanta-based beverage maker, sold a total of $ 11.5 billion in debt in March and April. Meanwhile, Coca-Cola had about $ 8.8 billion in untapped lines of credit, according to a spokesperson. The company declined to comment further.

More than 40% of companies that issued bonds between March and the end of June did not use existing lines of credit, while nearly 60% used the proceeds of the bonds to repay lines of credit, according to the study. .

Kraft Heinz Co.

, the consumer goods giant, sold $ 3.5 billion worth of bonds in May and used the proceeds to pay off older debts, according to a spokesperson. The company pulled one of its credit facilities in March, but repaid its entire revolver in June, the spokesperson added.

Societe Generale Électrique.

issued $ 13.5 billion in debt in the second quarter, using the proceeds to pay off $ 10.5 billion in shorter-term debt. It also refinanced a $ 15 billion credit facility, which went unused throughout the quarter.

For companies, selling bonds was often cheaper than taking out lines of credit and provided them with longer-term funds compared to bank loans, the Columbia Business School researchers found. “The cost of funds for bonds may have fallen disproportionately relative to lending, with many issuers borrowing at historically low rates,” the study said. Preventing large drawdowns on lines of credit can help weaker companies preserve these facilities longer and also reduce balance sheet constraints for banks, the study found.

The use of bond proceeds by speculative-grade companies has evolved since the second quarter, said Evan Friedman, head of covenants research at Moody’s Investors Service Inc., a rating firm. Although CFOs initially stored money on balance sheets, they later turned to paying off lines of credit and paying off older, more expensive debt.

Firms in the high-yield space are now starting to spend bond proceeds on debt buyouts and mergers and acquisitions, he added.

It will be time, however, before companies embark on new large-scale investments, said Christina Padgett, head of leverage finance research at Moody’s.

“There is a fair amount of uncertainty, which needs to dissipate before you see more investment from business,” said Padgett, noting the lack of clarity on the pace of the economic recovery. “The most important thing you can have in this situation is liquidity.”

The Fed declined to comment on the study’s findings.

Write to Nina Trentmann at

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