Big Business Buys Back Billions Of Debt, Bracing For Higher Rates

Some of the biggest corporate borrowers in America are buying back billions of their own debt, as the Federal Reserve plans additional interest-rate hikes.

The government's benchmark rate, used to set the higher rates charged to borrowers, has risen from less than 0.5 percent in 2015, to over 2 percent today, with another hike expected next month.

If companies keep buying back debt instead of borrowing to grow, the trend is likely to slow U.S. economic growth, capping years of higher profits and the impact of this year's Trump tax cuts. But many investors expect earnings and share values will still go up.

In Wilmington, the reorganized DuPont Co., which is scheduled to be spun off by DowDuPont in the spring, said Tuesday it is offering to buy back $6.2 billion of its debt, at premiums of $30 per $1,000 outstanding, on a range of notes and debentures that had been scheduled to mature between next March and 2038. The offer begins Nov. 28 and runs through Dec. 11. DowDuPont shares rose 1.3 percent in early trading to $58.44 just before noon.

DowDuPont expects to pay for the DuPont Co. bonds and other debt with a massive note sale of its own. The company plans to pay down $2 billion in debt at its planned Michigan-based Dow Chemical spin-off; reduce debt by $10 billion at Wilmington-based Corteva Agriscience, the new company formed by Dow and DuPont pesticide and genetically-modified seed businesses (Corteva is also taking on $6 billion in the companies' pension obligations); and finance up to $3 billion in share buybacks. Dow and DuPont will still owe many billions. "This is a process, not a single event," says DuPont spokesman Gregg Schmidt.

In New York, General Electric Corp. said Monday it will sell more assets "with urgency" to reduce the potentially crippling debt load its bosses took on when it was a larger, more profitable company. The company lost $23 billion in the three months ended Sept. 30, cut its dividend, and acknowledged a government probe of its accounting. GE shares, which had lost three-quarters of their value since January, rose 5 percent to $8.40 in Tuesday morning's trading.

GE bonds have been trading "far below par," and credit-default swaps — a kind of investor insurance against bond defaults — have risen to more than 3 percent of bonds' purchase value, with some investors shorting (betting against) GE bonds,  Reuters reported. Disappointing investors, GE last year collected less than $3 billion in the sale of its locomotive business, which has plants in Grove City, Pa. and Texas, to a partnership managed by Wabtec Corp. GE CEO Larry Culp has said sales of GE's money-losing power unit and its aviation unit are less likely.

The two industrial powerhouse companies, which have been selling units and cutting costs under shareholder pressure, are buying back their debt as the U.S. Treasury seeks to sell a lot more government debt into world markets. The government has borrowed another $1.2 trillion since President Trump signed Republicans' extensive tax cuts at the end of 2017, despite Treasury Secretary Steve Mnuchin's assurance the tax reform "will pay for itself" over the next 10 years (see Fox News video, especially at 2:30), and expects expanded borrowing next year.

"Who is going to buy $1.3 trillion in new U.S. government debt?" Matt Topley, chief investment officer at Fortis Advisors in King of Prussia, asked clients in his newsletter Tuesday. Topley noted that Asian investors — including Korea and Singapore, as well as China and Japan — have been buying less U.S. government debt recently, just half of last year's rate even as the supply of Treasury bills and notes grows. U.S. investors and buyers elsewhere in the world are still buying.

GE and other companies engaged in buybacks are being prudent in the face of higher Fed interest rates and worries over Trump tariffs that threaten to depress U.S.-China trade. These companies will use proceeds to "lower debt" and reduce their interest-to-income ratios, which "reduces operating profit-margin risk and, by extension, improves return on equity" investment, says Howard A. Trauger, president of the Bond Club of Philadelphia and managing director at Carnegie Investment Counsel.

With Fed rates rising and inflation uncertain in the face of the tariff war, borrowing "can be done at a lower future-cost today," Trauger added. "Otherwise, the debt continues to be a drag on their ratings and operating options."

Rising interest rates reduce corporate demand for debt, noted commercial banking analyst Frederick Cannon in a recent report to clients of Keefe, Bruyette and Woods in New York. U.S. corporations as a group "have a record level of debt already, higher interest rates reduce demand, and the tax cuts improved corporate profitability but had a limited impact on consumer demand," Cannon added.

Banks' Commercial and Industrial loans reported to the FDIC "did move up in the first half of 2018, but growth rates have recently stalled. And, commercial real estate lending is on a downward trajectory."

After a decade of near-record low interest rates, U.S. private debt remains high and rising. "Nonfinancial corporate debt is now approaching 50 percent of Gross Domestic Product," Cannon added, citing Federal Reserve data. Small banks are still recording rising loan volume, but Cannon expects that to "stall out" soon.