Monday, November 6, 2017

[U] Some Pretty Wise Blue-Chip Corporate Finance People Believe US Interest Rates Are Headed North, And Soon...


UPDATED: After a great comment from long time reader Billy the Kid, on the backup site. . . I had this thought, about the additional implications of this debt tender: "One other twist on it might be that Merck's finance folks are essentially throwing in the towel on an outright foreign retained earnings repatriation tax "holiday" (and perhaps, on Trump's tax package overall, at least before 2018 mid-term elections). . .

This move will not rely on any change in tax law -- to be profitable -- for Kenilworth.

Put that in your pipe and smoke it, 45. . . .
" [End, updated portion] -- With a holla-back to Dante, on the backup, at 9:07 last night! Smile.

The corporate treasury folk under Rob Davis in Kenilworth have launched a tender offer for up to eight separate tranches of longer term Merck unsecured debt obligations, today. They must assume we are reaching the bottom of the near term yield curve.

All the debt being taken out under today's offer (and likely refinanced -- or being paid off -- with some of the $70 billion in foreign trapped cash we've long discussed -- in a tax efficient manner) shows coupon-rates ranging from 5.75% to 6.55%.

In sum, Merck is offering to buy back this higher interest rate denominated debt, and effectively swap it out for lower coupon, similar maturities, now that current prevailing interest rates of like kind are well below (like a half to a third cheaper than) these older coupons. Or just retire it with a structured EU to US swap out of cash (in a tax efficient manner), using that parked cash over there. But my hunch is that the company is likely to want to keep its leverage about where it is -- in terms of capital structure -- so the treasury people are (in my humble estimation) likely to ultimately layer in more new debt of like maturities, between now and the end of Q1 2018.

The most likely reason a company of Merck's size would pull the trigger on this deal now, is to take advantage of what it sees at the bottom of the market, on interest rates. In sum, Merck expects that interest rates on similar grade corporate debt are going to increase, over the near term. So hop on it -- and be unafraid to pay up to $1.40 per $1.00 of debt redeemed, to get it all in -- and then push it back out, at half the current coupon rates.

Even on as much as $2,900,000,000 (that's $2.9 billion) in retired debt, Merck will save a bundle over the life of these notes, if the company is right that 45's ham-handed moves at the Fed are signaling a likely rate hike.

Me? I think the company is right -- rates will rise, and soon -- so this is a very savvy move.

Now I'm out (not much in the mood for trivial capitalist banter, on such a bone-chilling day) -- after all the senseless carnage in Texas. . . . Killing 26, in an escalated family squabble, whilst they are at worship? As many as half of them children? That is wantonly evil -- as well (I am sure) as clear evidence of deeply seated (and apparently long-standing) emotional illnesses. I am largely reeling, that the GOP and Trump are so stubbornly resisting trying to do anything about the 649 dead and injured Americans, just since he took office -- directly caused by automatic assault style human killing weapons, high capacity magazines, and bump-stock accelerators.

That too. . . is evil -- in my estimation. Falling silent now.

नमस्ते

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