Directions: Read the article and answer question 1. Must respond in essay format and needs to be 2-4 pages.
Investment Analysis
Online Assignment #1
| Bond Market Cracks Open for Blue-Chip Companies—Then Slams Shut By Liz Hoffman Sebastian Pellejero | March 18, 2020 |
| Summary: Companies issued around $28 billion in bonds Tuesday. Exxon sold $8.5 billion and PepsiCo Inc. sold $6.5 billion, and both said they would use the proceeds to pay off shorter-term debt known as commercial paper. Goldman Sachs also issued $2.5 billion of bonds, following reverse inquiry from prospective investors. There were zero deals on Monday. The ability of companies—particularly big, creditworthy ones—to keep funding their ones—to keep funding their operations is a key measure of the turmoil that has gripped markets in recent days as the coronavirus outbreak worsens. The picture is bleaker for low-rated companies; high-yield bond issuance has virtually stopped. Classroom Application: This article provides an opportunity to discuss how both companies and investors are responding to the outbreak of the Covid-19 virus and its impact on the economy and financial markets. In particular, the importance of liquidity and pricing of risk can be drawn out in connection with the issuance trends and investor appetite referenced in this piece. Questions: 1. According to the article, why are companies seeking to raise debt and/or draw down on their credit lines? 2. What is the recommendation of former Federal Reserve heads Ben Bernanke and Janet Yellen and why do you think they are proposing this step? 3. Why do you think the “window” for raising debt is opening and closing so rapidly in this environment? |
| Prepared By: Prof. John D. Fuller, CUNY Lehman College Bond Market Cracks Open for Blue-Chip Companies—Then Slams Shut; Companies issued around $28 billion in bonds Tuesday after no deals on Monday Pellejero, Sebastian; Hoffman, Liz. Wall Street Journal (Online); New York, N.Y. [New York, N.Y]18 Mar 2020.
Goldman Sachs Group Inc. bankers were marketing bonds for Verizon Communications Inc. and Exxon Mobil Corp. on Tuesday when investors countered with an offer: If Goldman were interested in raising some cash for itself, they would be interested in buying. Goldman did just that, issuing $2.5 billion of bonds due in 2030 at 3 percentage points over a government rate. It was a participant two ways—issuer and underwriter—when the window briefly cracked open for blue-chip companies to raise cash by selling bonds. By Wednesday morning, the window had shut again, with far fewer deals in the market, bankers and investors said. Companies issued around $28 billion in bonds Tuesday. Exxon sold $8.5 billion and PepsiCo Inc. sold $6.5 billion, and both said they would use the proceeds to pay off shorter-term debt known as commercial paper. There were zero deals on Monday. The ability of companies—particularly big, creditworthy ones—to keep funding their operations is a key measure of the turmoil that has gripped markets in recent days as the coronavirus outbreak worsens. The picture is bleaker for low-rated companies; high-yield bond issuance has virtually stopped. “Any day the markets are functioning is a good day,” said Tom Murphy, head of investment-grade credit at Columbia Threadneedle. “It’s a healthy development for investors to get a sense for where paper really clears, and it’s good for companies who need access to liquidity.” Former Federal Reserve heads Ben Bernanke and Janet Yellen said Wednesday that the central bank should consider purchasing highly rated corporate bonds, which central banks in Europe, Japan and the U.K. already have done. The Fed would need to ask Congress for that authority. So far, the central bank has limited its market purchases to government bonds and commercial paper. The moves, unprecedented since the 2008 financial crisis, are meant to provide liquidity and free up banks to lend. In a sign of worry over whether they will be able to raise fresh debt, big companies are drawing down their credit lines from banks. Borrowers include names hard-hit by the downturn such as Boeing Co., diner chain Denny’s Corp., Southwest Airlines Co., Wynn Resorts Ltd. and Marriott International Inc., which on Tuesday started furloughing thousands of employees. Since March 11, 16 U.S. companies have said they plan to draw down more than $39 billion on their credit lines, according to Bank of America Corp. data. Just 40 companies with investment-grade credit ratings have sold bonds in March, according to Dealogic, the fewest since at least 2018. Companies with little cash compared to near-term debt—a sign that they may need to borrow—include food processors Archer Daniels Midland Co. and Bunge Ltd., as well as FedEx Corp and truck-rental firm Ryder System Inc., according to Bank of America. The bank itself sold $3 billion of 30-year notes charging around 4% on Tuesday. Write to Sebastian Pellejero at sebastian.pellejero@wsj.com and Liz Hoffman at liz.hoffman@wsj.com Credit: By Sebastian Pellejero and Liz Hoffman Copyright 2020 Dow Jones & Company, Inc. All Rights Reserved. |
| CUNY Lehman College MSB 710 – Investment Analysis Online Assignment #2 |
| Companies Mull Suspending, Ramping Up Share Buyback Plans Amid Coronavirus By Kristin Broughton Mark Maurer | March 17, 2020 |
| Summary: Finance chiefs are grappling with whether to make share repurchases or hold on to cash as stock prices fall on fears surrounding the coronavirus pandemic. The S&P 500 has plummeted about 25% since Feb. 18. Some companies appear to be taking advantage of the down market, announcing plans to scoop up shares. Others, however, have said they would suspend share buyback plans to preserve cash and exercise caution in an uncertain period. Companies often buy their own shares in an effort to help boost earnings per share and stock prices. But companies need to stay sufficiently capitalized to resist financial hits from economic conditions spurred by the pandemic. In some instances, businesses have opted to raise cash by drawing down credit facilities with lenders. Classroom Application: This article provides an opportunity to discuss a host of financial management issues, most notably capital allocation and liquidity management. On the one hand, companies might view repurchasing their own shares at these levels to be value-additive. On the other hand, they may wish to preserve cash, given the current macroeconomic uncertainty. Weighing these competing strategies is no doubt on the C-suite agenda. Questions: 1. Why have selected companies decided to suspend their share repurchases? 2. Why have other companies authorized share repurchases? 3. If you were the CFO of a retail business like the Gap, what would you do? If you were the CFO of Oracle, what would you do? |
| Prepared By: Prof. John D. Fuller, CUNY Lehman College Companies Mull Suspending, Ramping Up Share Buyback Plans Amid Coronavirus; Gap, DSV Panalpina and major banks said they would halt their repurchase programs Maurer, Mark; Broughton, Kristin Wall Street Journal (Online); New York, N.Y. [New York, N.Y]17 Mar 2020. Finance chiefs are grappling with whether to make share repurchases or hold on to cash as stock prices fall on fears surrounding the coronavirus pandemic. The S&P 500 has plummeted about 25% since Feb. 18. Some companies appear to be taking advantage of the down market, announcing plans to scoop up shares. Others, however, have said they would suspend share buyback plans to preserve cash and exercise caution in an uncertain period. “The buybacks really now have to compete again with companies’ other priorities,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. Companies often buy their own shares in an effort to help boost earnings per share and stock prices. But companies need to stay sufficiently capitalized to resist financial hits from economic conditions spurred by the pandemic. In some instances, businesses have opted to raise cash by drawing down credit facilities with lenders. To help unclog the financial system, the Federal Reserve on Sunday cut its benchmark interest rate to near zero and took steps to prevent market disruptions. The Financial Services Forum, which represents the biggest U.S. lenders and custody banks, on Sunday said the banks would suspend buybacks after the rate cut, in a move to help consumers and businesses struggling with the rapid economic slowdown. “It’s not a situation where you want to test the boundaries,” Jens Lund, the finance chief of European freight forwarder DSV Panalpina A/S, said in an interview. DSV on Monday said it decided to temporarily suspend buybacks until it had a better overview of the virus’s financial implications. “Right now, it’s a situation where you want to be safe,” Mr. Lund said. Gap Inc., Nordstrom Inc., Southwest Airlines Co., Alaska Air Group Inc., Northern Trust Corp., Comerica Inc., PNC Financial Services Group Inc., Capital One Financial Corp., BankUnited Inc., Regions Financial Corp., and Fifth Third Bancorp are among the other companies that have announced intentions to halt buybacks since early last week. Since markets recovered from the financial crisis of 2008, buybacks served as a major source of equity demand. Companies spent excess cash on buybacks and on funding mergers and acquisitions, dividend payouts or other capital expenditures. Twenty-three companies in the S&P 500 announced they would suspend their programs so far this year, up from none in 2019, according to equity research firm Birinyi Associates. Companies’ authorization of future buybacks through March 17, totaling about $153 billion, marked a 39% drop from the same period a year ago, according to data from Birinyi Associates. Market volatility created by the coronavirus pandemic has led to lower levels of cash balances amid a drop-off in demand caused by the outbreak. Gap, which warned that recent volatility is making it difficult to analyze its business, is trying to be prudent with expense and inventory management and capital spending as the company navigates the period of uncertainty, Gap’s incoming chief executive, Sonia Syngal, said on an earnings call on Thursday. Companies are expected to increasingly scale back or halt buyback plans, said Torsten Slok, chief economist at Deutsche Bank Securities. Meanwhile, companies such as Chinese e-commerce giant JD.com Inc., business software company Oracle Corp., building-products maker Patrick Industries Inc., real-estate investment trust NexPoint Residential Trust Inc. have in the past week authorized stock repurchases . The recent market correction in equities provides a window for businesses to repurchase more of their stock at lower prices. “It’s basically gone on clearance sale in the past few days, and we think it’s an enormous—it’s a fantastic investment,” Safra Catz, chief executive of Oracle, said on a Thursday earnings call. The companies that might want to ramp up share buybacks feel as though they have enough cash, which could be viewed by investors as a sign of strength in difficult times, Mr. Slok said. Investors expect companies to be clear about their capital allocation strategies and they understand that share buyback decisions vary by company, said Ken Bertsch, executive director at the Council of Institutional Investors. “We don’t know how bad this could get,” Mr. Bertsch said. “So if I were a CFO, I’d err on the side of caution at the moment.” Write to Mark Maurer at mark.maurer@wsj.com and Kristin Broughton at Kristin.Broughton@wsj.com Credit: By Mark Maurer and Kristin Broughton Copyright 2020 Dow Jones & Company, Inc. All Rights Reserved. |
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