On July 29, 2010 McDonald’s Corp did what many Americans are doing, and even more wish they could do, which is to borrow funds at record low interest rates.
The Wall Street Journal reported that McDonald’s borrowed $750 million in the bond market, selling 10 year bonds paying 3.5% and 30 year bonds which pay 4.875%. These are the lowest rates that a US company has been able to pay on a bond since at least 1995, according to the WSJ article. The article cited many other companies which are doing the same, at record low interest rates.
While these are historically low borrowing rates, and thus, for the purchasers of the bonds, they are receiving low returns on the bonds, there is a long term positive to this. For shareholders of McDonald’s, and many other companies that are issuing debt at this time, these low rates are providing these firms cash with very low cost of capital. They will be able to use the funds to grow and expand their businesses, or to pay off other higher interest debt. Either way, their intention is to increase their companies’ cash flow and earnings.
In the short run, the stock market can be quite volatile. In the long run, a company’s stock price should be correlated to it’s ability to generate cash flow and earnings. Thus, by borrowing at these low rates, their future stock prices should be positively affected, which is good for stockholders in general. Another reason to be optimistic about the future prospects of equity markets.
Source: McDonald’s Deal Sets Low for Bond Interest Rates, WSJ.com, 7/29/10