Money – You Can’t Give It Away

A momentous item of news last week (which arose while I was on holiday and hence the late post) was the astonishing fact that two public companies, Henkel and Sanofi, sold bonds with negative coupons. Yes the purchasers of their bonds are guaranteed to get back less than they paid for them in a few years time giving an effective return of minus 0.5%.

In a normal financial world, you have to pay to borrow money you do not have. More recently interest rates have dropped to zero so lenders are effectively giving money away without compensation even though they are taking some risk on getting it repaid. But the world is now so awash with money which cannot find a productive home as the result of Quantitative Easing (QE), that these companies are asking to be paid to take money off your hands. And they are getting paid!

Now negative interest rates may be a recent phenomenon but have mainly applied to Government issued sovereign debt which is normally seen as “risk free” – or at least as near as you can get it for AAA rated countries (not the UK of course). But we now have zero rates on company debt which is clearly in a somewhat different risk category, i.e. higher.

It seems likely that the purchasers of these bonds are simply taking them up because they cannot find a better deal. But will the ability to sell such bonds mean companies will issue lots of debt and avoid issuing equity? For example, was the purchase by Micro Focus of HPE’s software business commented on in a previous blog post, to be partly financed by debt (taking on $5.5 billion of debt), a symptom of this? But that can be an exceedingly risky strategy particularly if the debt is short term (as in the Henkel and Sanofi arrangements) and is financing long term business development.

Roger Lawson

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