3 Companies Slashing Interest Expense
There are many times in business where issuing debt is the most sensible move available. But companies need to watch their interest expenses as well -- a poorly managed debt load can result in a large part of a company's revenues going to service that debt.
But these three companies are taking action to reduce interest expense and improve their balance sheets.
Air Canada is no stranger to the world of debt. Debt loads and a poor economy created a poor outlook for Air Canada during the summer of 2012 when shares of the airline fell into the penny-stock range. But the airline has made meaningful strides in managing its debt.
Thanks to an improving outlook for Air Canada and the airline industry in general, the Canadian flag carrier was able to complete a $1.4 billion refinancing transaction in September of this year. Air Canada retired notes yielding 9.2%, 10.1%, and 12.0%, refinancing them with notes yielding 6.7%, 7.6%, and 8.7%. The move not only lowered Air Canada's cost structure but it also extended the maturity of the debt by four years giving the airline more flexibility in the near term.
Shares of the airlines have had a strong negative aura of debt surrounding them and this move helps to reduce this drawback to owning Air Canada shares.
Leading legacy airline
The term "legacy airline" rarely is associated with financial responsibility, but Delta Air Lines is trying to change that image with its actions regarding its debt load. In 2009, Delta's net debt hit $17 billion but the airline has been taking action to change that in recent years.
By 2012, Delta had reduced its net debt to $12 billion but the airline isn't stopping there. Targets call for slashing this net debt by another $5 billion by 2017. Delta claims this debt reduction strategy will save the airline more than $750 million in interest expense.
Delta's improving financial health has even allowed the airline to reinstate a dividend and launch a share buyback program, which is unusual among legacy airlines.
A major bearish point of contention surrounding Hertz Global Holdings is the car rental company's debt load. Not only has Hertz been subject to ownership by private equity and the large costs relating to purchasing and renewing a massive fleet of vehicles, but the acquisition of Dollar Thrifty put even more debt onto Hertz's balance sheet.
Hertz is making moves to refinance its debt; its Dutch subsidiary issues 4.4% notes due in 2019 to finance the repurchasing of 8.5% notes due in 2015. Similar to the refinancing at Air Canada, this move both reduces Hertz's interest expense and delays debt maturity to provide additional flexibility.
Properly managed debt can fuel the greatest companies while poorly managed debt can destroy otherwise healthy companies. Air Canada, Delta Air Lines, and Hertz Global Holdings have all taken steps to manage their large debt loads. These are important steps to rebuild investor confidence and attract new investors. Additionally, a stronger balance sheet makes it easier for these companies to issue new debt if this is required to meet obligations or pursue a new opportunity.
More Foolish insight
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The article 3 Companies Slashing Interest Expense originally appeared on Fool.com.Alexander MacLennan owns shares of Air Canada and Delta Air Lines and has the following options: long January 2015 $22 calls on Delta Air Lines, long January 2015 $25 calls on Delta Air Lines, long January 2015 $30 calls on Delta Air Lines, and long January 2014 $20 calls on Hertz Global Holdings. The Motley Fool owns shares of Hertz Global Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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