CFOs are particularly eager to reduce debts that are linked to floating rates.
The Aflac duck is a rock star in Japan, where its sales of supplemental health insurance generate about 70% of its revenue.
When Max Brodén, the Columbus, Georgia-based company’s CFO, thought about getting rid of Aflac’s senior notes maturing in 2024 and 2025, he investigated the Nippon market.
He saw that the Federal Reserve was outpacing the Japanese central bank in raising its interest rates, and that the differential between US and Japanese rates was substantial. That’s why Aflac issued 180 billion yen (about $1.2 billion) in a term loan and a bond.
The insurer redeemed all its US notes outstanding for which it had been paying 3.49% in interest and replaced them with new debt at a lower 0.89% rate.
When inflation persists, the Fed adjusts its interest rates. Borrowing costs rise and astute financial wizards reduce their debts so as to control expenses. Aflac found its martingale in Japan; other companies simply pay down part of their debts.
Chemical giant Dupont recently announced that it would pay off $1.3 billion of its commercial paper balance during the fourth quarter of this year and, at the same time, retire $2.5 billion of senior notes due in 2023. That decision should create $100 million in pretax savings.
Toy maker Hasbro is following a similar strategy. The company announced the future sale of its film and TV business, Entertainment One. That subsidiary was bought three years ago for $3.8 billion. If the company finds interested buyers, that will reduce its debt load.
Kohl’s, which operates more than 1,100 department stores across the US, is also going frugal. The group will pay down its $668 million revolving loan in December when consumers are purchasing their end-of-year gifts. Kohl’s will likewise eliminate its $275 million in bonds in 2023.
CFOs are particularly eager to reduce debts that are linked to floating rates. For instance, the marketplace for used cars, KAR Auction Services, just repaid a $900 million term loan. The 5% interest rate on that loan was poised to jump to 7%.