In a world of rock-bottom rates, some corporate issuers are finding ways to save even more. Time Warner Cable, a U.S. pay-TV operator with only domestic customers, just sold $1-billion (U.S.) of 30-year paper denominated in sterling. The textbook arbitrage may save it 25 basis points. It shows that even crazy cheap debt can be cheaper still.
The decision, on its face, sounds penny wise and pound foolish. Heading into Europe just as everyone else is trying to get out could potentially be dangerous. But Time Warner Cable structured the deal so it makes interest payments in dollars, not pounds, eliminating currency risk for the company. This clever fundraising does, however, require some financial gymnastics.
First, the bonds need to have a maturity of at least 20 years, to entice British pension funds and their long-term liabilities. U.K. companies haven’t been able to supply enough to meet the demand. That helps reduce the rates a U.S. issuer needs to pay. Converting the fixed-rate sterling debt to fixed-rate dollar isn’t straightforward, but traders can get there by using floating-rate swaps. And the three-step process actually wrings out additional savings for the issuer by exploiting market inefficiencies.
In Time Warner Cable’s case, paying 5.25 per cent, instead of the 5.5 per cent it probably would have by issuing in the United States, should work out to about $75-million of savings over the life of the loan. Not every company can take advantage of the situation, however.
British pension funds are only interested in companies with investment-grade ratings. Size also matters. Large companies, like Time Warner Cable and AT&T, are the ones that can underwrite European road shows and get behind the sorts of currency swaps that make the strategy work.
There has been only $3-billion of sterling-denominated issuance by U.S. companies so far this year, according to Thomson Reuters data. With the money so easy, though, it would be surprising not to see more of it soon.
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