Corporate Bond Conundrum?

Highly-rated corporate bonds have been a hot item lately (which creates problems for the Fed and Treasury, as they serve as an alternative to the massive amounts of low-or-no yielding Treasury debt), but this International Herald Tribune article reminds us of the staggering amount of corporate debt coming due this year, especially with the rapidly deteriorating profit outlook sure to dampen possibility of rollover:

U.S. credit markets tight as corporate bills come due
International Herald Tribune
By Jack Healy and Vikas Bajaj
Monday, January 19, 2009

Like consumers and homeowners, American corporations binged on easy credit when times were flush, racking up huge debts. Now the bills are due, and paying them back will not be easy, or cheap.

This year alone, more than $700 billion in corporate loans will come due, according to Standard & Poor’s. That is the size of the federal bailout of the financial sector. Many companies were counting on being able to borrow more money to meet those obligations and kick their debt further down the road.

But with the credit markets still tight, corporations are being forced to pay much higher interest rates than they did a few years ago, putting more strain on balance sheets already hammered by falling profits and a grinding recession.

It is a lesson the discount carrier Southwest Airlines learned firsthand in December, when it went to the bond markets to raise $400 million, in part to cover its losses from betting that fuel costs would remain high.

Southwest, the only domestic airline with an investment-grade credit rating, put up 17 of its Boeing jets as collateral and agreed to pay interest of 10.5 percent, nearly double the rate it had paid in 2004 to raise $350 million. The company chafed at the costs, but it paid them because it needed cash and did not know what credit markets would look like in six months or a year.

“That’s the market now,” said Laura Wright, the airline’s chief financial officer. “There is not money available at the rates we were able to get a year ago.”

Read the rest of the article

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