American companies save $700 billion in loan interest due to the unprecedented stimulus measures implemented by the Federal Reserve (Fed).
Corporate bond yields have fallen in the past four years from 6.14% between 2003 and 2008 to an average of 4.6%, annual savings equivalent to $15.4 million for each $1 billion borrowed.
Companies took advantage of the Fed’s policy of low interest rates, maturities of large and attracted cash by selling $5,160 billion worth of bonds, according to Bloomberg data.
“The stimulus was a huge saving grace in the economy overall. It probably kept some businesses from failing because they were able to refinance their debt at lower interest payments,” said J. Michael Schlotman, Chief Financial Officer of Cincinnati-based Kroger Co., a company that saved about $80 million comparing to what it would have paid before the onset of the financial crisis.
The policy rate near zero and bond purchases of more than $3,000 billion by the Fed since December 2008 show that savings by more than 2,000 corporations exceed the GDP of Switzerland, $632 billion.
The funds saved were used to expand businesses and boost up hiring. Companies increased their capital spending to $699 billion in the second quarter of 2013, the highest level in almost 10 years and up by 8.7% over the same period of last year, according to JP Morgan Chase.
Companies have sold in the month following the bankruptcy of Lehman Brothers bonds worth $21.9 billion in the investment grade category, less than half the value of a bond program launched by Verizon last week.
IBM, the largest IT services provider in the world, sold in May seven-year term bonds worth $1.25 billion with a record low coupon of 1.625%. In 2007 the company issued 10-year bonds with a 5.7% coupon.
Verizon Telecommunications Group sold bonds last week worth $49 billion in eight parts, the largest ever recorded corporate issuance to finance the $130 billion acquisition of the rest of Vodafone Group’s shares in Verizon Wireless.
The U.S. economy is under recovery and the Fed could very soon start reducing the stimulus.
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