Big Companies Borrowing Billions

New issues in U.S. corporate bond markets topped $46 billion last week, with just two issuers selling more than one-third of the total. Those two and a few others are profiled below.

Last week's biggest debt-gusher was Petrobras . The Brazilian energy firm pumped out $11 billion of paper spread over six tranches with maturities ranging from three- to 30 years. The money will be used "to finance Petrobras' planned capital expenditures under its 2013-2017 Business Plan and for general corporate purposes." Even though the Petrobras paper carried investment-grade ratings, the 10-year coupon rate of 4.375% was higher than the 10-year rates on some of the previous week's junk issues.

Merck wrote six prescriptions for notes with three- to 30-year maturities totaling $6.5 billion. The company plans to use the money for stock buybacks -- that's nearly 5% of Merck's market cap. Because Merck's dividend yield is higher than the weighted average coupon rate, the dividend payouts saved are greater than the debt service costs. Merck could improve its cash flow by more than $110 million per year with this deal, and that's before taking tax savings or the possibility of future dividend hikes into account.

American Express swiped its plastic for two transactions totaling $1.85 billion, with $1 billion of the new money being used to redeem maturing 4.875% debt and the remainder going to the ever-popular "general corporate purposes." Because the new paper -- a five-year floating-rate note and a five-year 1.55% note -- has much lower rates than the maturing paper, American Express will save money on debt service no matter what the "general corporate purpose" turns out to be.

In the high-yield market, Tenet Healthcare sold $1.05 billion of 8.5-year notes with a 4.375% coupon rate. The money is funding a tender offer for $925 million of Tenet's 8.875% notes maturing in 2019. Tenet is offering $1,133.18 for each $1,000 face value of the 2019 bonds. Even with the premium offered for the 2019 bonds, the deal will save Tenet about $35 million per year in debt service.

Covidien sold $750 million of 2.95% 10-year notes. The money is being used to redeem $500 million of 1.875% senior notes due June 2013 and for general corporate purposes. Depending on the general corporate purposes, the deal will raise interest payments to about $13 million per year, making Covidien one of the few companies to increase its debt service costs with a refinance in recent times.

Low rates continue to make it cheap for companies to fund capital-expenditure programs, refinance debt, and buy back stock. Yet borrowing cheap money does come with some risks. First, there's no guarantee that credit markets will have as many lenders bidding down rates when it comes time to pay back the money. Nearly free money also lowers the bar for investment and cap-ex programs. The lower cost is good, but it does increase the chance that companies will fund lower-quality, higher-risk expansions or acquisitions. Buybacks add risk that the company is paying top dollar for its stock, particularly with market indexes at or near all-time highs. As always, stock investors should keep tabs on company borrowing habits and try to assess whether borrowed money is being used wisely.

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