Companies across the country looked to their credit lines to provide liquidity during the coronavirus pandemic, and those that are paying down credit via the bond market are worth a look for potential investment.
As the coronavirus pandemic caused a massive strain on the U.S. economy, businesses started drawing their credit lines to provide the necessary cash just to survive.
Now several of those companies are selling bonds to help pay down that credit debt.
And those companies are ones investors can look to for long-term stability.
Here’s why.
Companies Hitting the Bond Market
According to Reuters, Bank of America analysts estimates that more than 170 U.S. companies approached lenders to draw down more than $120 billion in prearranged credit lines.
Now, however, several of those companies are issuing corporate bonds with the intention of using the money to pay down those credit lines.
“Now we are seeing signs that some companies have confidence they can get to the other side because they are issuing corporate bonds to pay down credit lines,” Bank of America head of U.S. investment-grade credit strategy said in a note.
These companies have already said they are using the bond market to pay down their credit lines, according to Reuters:
- VF Corp. (NYSE: VFC).
- Kroger Co. (NYSE: KR).
- Micron Technology Inc. (Nasdaq: MU).
- American Water Works Co. Inc. (NYSE: AWK).
There are other big companies that have also gone to the bond market for capital, but it’s unclear if they plan to use that for credit draw-downs. According to Barron’s, these companies recently sold unsecured bonds:
- PayPal Holdings Inc. (Nasdaq: PYPL).
- Fiserv Inc. (Nasdaq: FISV).
- Regency Centers Corp. (Nasdaq: REG).
- Mondelez International Inc. (Nasdaq: MDLZ).
- Lam Research Corp. (Nasdaq: LCRX).
- Dillard’s Inc. (NYSE: DDS).
- LyondellBasell Industries NV (NYSE: LYB).
The Walt Disney Co. (NYSE: DIS) also recently looked to the bond market to pay back cash borrowed in the commercial paper market, and to refinance $1.25 billion in bonds set to mature in June.
Why Investors Should Pay Attention
Not every company uses proceeds from the sale of corporate bonds to pay down credit lines.
But those who do are doing it for a reason. Especially now.
Because of the recent decision by the Federal Reserve to buy up assets like corporate bonds, credit markets are doing very well during this economic downturn.
Investment-grade bond issuers have benefited most from the Fed’s interventions.
It has helped the long-term bond market become advantageous to companies as it is cheaper than looking at short-term bank debt.
By going to the long-term debt market, companies can push the maturity of their bonds to five years and beyond, giving them a degree of breathing room when faced with continued market uncertainty.
Essentially, these companies have more time to rebound from the coronavirus lockdown before the debt from the bonds needs to either be refinanced or repaid.
As an investor, it’s worth looking at companies using bond market proceeds to pay revolving credit lines. They are using cheaper money to pay off more expensive money.
They are also helping to ensure their survival well beyond the pandemic that will push countless businesses big and small into bankruptcy.
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