Boston, MA 02/28/2014 (wallstreetpr) – The soft interest rate regime is giving rise to companies like Cisco Systems, Inc. (NASDAQ:CSCO) to reduce their interest burden. Companies are approaching the money markets to roll over their costly debts to far cheaper options available with longer maturities.
Cisco’s financial gain:
The soft interest rate regime as well as interest in investment grade corporate debt offerings have seen Cisco Systems, Inc. (NASDAQ:CSCO) approach the bond market. The company plans to use the proceeds to replace costly debt as well as to finance share buy-backs. In a first such offering in the last three years, Cisco has sold bonds worth almost $8 billion in seven tranches of fixed and variable rate securities. The maturities vary from 18 months to 10 years, giving the company time to plan out for redemptions. These were so well accepted in the market that they offer was oversubscribed by almost 2.5 times. Cisco is not the only company to take this route. Many giants including the venerable Apple Inc (NASDAQ:AAPL) have used this route to raise cheap money to fund their expansion plans.
The rate difference:
Though Cisco Systems, Inc. (NASDAQ:CSCO) offered very low premiums, the debt was still considered as investment grade. The most expensive of the debt with maturity of 10 years was at a coupon rate of just 3.63%, only 90 basis point more than 10-year Treasury rate. Treasury notes have a very low coupon rate as their redemptions are guaranteed by the federal government. The effective interest rate in the first few years comes to about 2%. It is very attractive considering that the company has issued maximum bonds with short term maturities. Interest rates are expected to climb upwards once the economic conditions improve and the government tapers its bond purchases.
Cisco Systems, Inc. (NASDAQ:CSCO) plans to use the proceeds to repay $3.75 billion debt maturing this year and use the balance to finance share buy back. A major bulk of the $47 billion cash pile with Cisco lies overseas and repatriating it back would entail significant tax issues.
