While consumer interest in mortgage refinancings has dried up in recent months, corporations, including several in Colorado, are taking advantage of historically low interest rates.
U.S. companies are expected to issue $667 billion in debt this year and $740 billion next year, surpassing the record of $676 billion set in 2001, according to the Bank of America.
In 2001, investment-grade corporate bonds yielded 7.32 percent. Currently, similar bonds yield 5.51 percent, according to Merrill Lynch.
The savings offered by refinancing are substantial.
“Firms are looking at debt they may have taken on in early 2000 or before, when there were higher interest rates,” said Mike Ruff, a fixed-income portfolio manager with the Russell Investment Group in Tacoma, Wash.
Qwest, the Denver-based phone company, estimated last month it will save $300 million a year after refinancing $3 billion worth of bonds carrying interest rates of 13 percent and higher.
The savings aren’t limited to corporate giants.
Front Range Capital Corp., parent of Heritage Bank, on Wed nesday redeemed $9.5 million worth of debt securities issued in late 2000 at an 11 percent interest rate.
The company used proceeds of a private debt offering made in November at a significantly lower interest rate to buy out the debt, which wasn’t due until 2030.
“It was at a more favorable rate of interest,” said Alice Voss, chief financial officer of Front Range Capital, based in Louisville.
Broomfield-based Level 3 Communications is in the middle of a $1.23 billion refinancing that seeks to buy more time rather than a lower rate.
The company wants bondholders to trade in notes due in 2008 paying between 9.12 percent and 11 percent for notes due in 2010 that pay 11.5 percent.
And some of the debt hitting the market represents new money.
This month, Frontier Airlines issued $80 million in convertible debt at a 5 percent interest rate to buy planes and expand operations.
Homebuilder MDC is offering $1 billion in debt and equity for general corporate purposes.
One reason corporations are finding it advantageous to issue debt is that investors are eager to buy fixed-income securities offering a higher yield, Ruff said.
The yield premium of corporate debt over much-safer government securities has shrunk to a five-year low, meaning investors are willing to take on more risk without much more return.
“People stretching for yield aren’t doing it without taking on meaningful risk,” Ruff said.
Bloomberg News contributed to this report.
Staff writer Aldo Svaldi can be reached at 303-820-1410 or asvaldi@denverpost.com.
