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Companies Race to Pay Down Debt as Recession Looms

By:
S.J. Steinhardt
Published Date:
Nov 9, 2022

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Anticipating a recession and further rises in interest rates, U.S. companies are paying down their debts to reduce their expenses, The Wall Street Journal reported.

In addition to the Federal Reserve Board’s raising the interest rate last week by another 0.75 percentage point to between 3.75 and 4 percent, the three-month secured overnight financing rate, which U.S. regulators prefer to the London interbank offered rate (Libor), was 4.22 percent as of Tuesday, up from 0.04 percent a year earlier.

Some companies are reacting to these rates by reducing expenses and interest costs. Others seek to put cash reserves to work rather than leave them in low-yield bank deposits.

Among those companies is chemical manufacturer DuPont de Nemours Inc., which plans to retire $2.5 billion of senior notes due in 2023, resulting in annualized pretax savings of $100 million, and to pay off its outstanding commercial paper balance of $1.3 billion during the fourth quarter. Another, cosmetics company e.l.f. Beauty Inc., plans to pay down about one quarter of its outstanding term loan during the quarter.

Non-investment grade companies are urgently looking for ways to trim interest costs than higher-rated companies, which have ample cash and access to the capital markets, David White, a senior managing director who advises CFOs at FTI Consulting Inc., told the Journal.

Such junk-rated companies include KAR Auction Services Inc., which operates a digital marketplace for second-hand cars. It used the $1.7 billion after-tax net proceeds that it generated from the sale of its wholesale auction business to pay down debt ahead of schedule.

Another is toy and costume company JAKKS Pacific Inc., which was recapitalized three years ago after the bankruptcy of one of its largest vendors, Toys ‘R’ Us. JAKKS made an advance payment of $17.5 million on its floating-rate term loan in the third quarter. The interest rate on the loan was about 7.5 percent as of June, and increased to 10.2 percent in the fourth quarter, according to the company’s CFO.

“If I have closer to a junk rating, that’s a game changer,” White said of these companies’ urgency to cut back. “It’s all about the here and now.”

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