Some Corporate Loans Are Cheaper Than Bonds

Some companies are eschwing the bond market for their financing needs.

Some borrowing choices could be cheaper than issuing corporate bonds. Companies with top-notch credit ratings that need to find financing for paying debts or acquisitions used to issue bonds. The rate of interest that they gave to investors was often inexpensive compared to what they would have to pay for a loan. But lately, well-known corporations—Oracle, Conagra, Philip Morris, Kroger—show a growing interest in loans. Software giant Oracle sold close to $20 billion in bonds in 2020. A year later, the company again sold $14.9 billion in bonds.

When the company announced last summer that it would buy the healthcare IT firm Cerner Corporation in a deal worth more than $28 billion; it was assumed that Oracle would soon return to the bond market. Instead, Oracle got a $15.7 billion bridge loan that was completed by $4.4 billion term loans with three and five-year maturities.

CFOs are doing their homework. They notice that banks are slower to adjust to Federal Reserve rate increases than the bond market. Sometimes, it takes several weeks, even months, to digest the last interest rate rise and this year, there have been five. The funding costs between a loan and a bond could reach half a percentage point. Banks are also eager to help good customers that bring other revenue streams to the institution, such as cash management or underwriting.

Finally, term loans could be a short-term solution—a simple one or two-year fix. That’s enough time to wait for the end of Fed increases and the return of a better funding environment. That’s also why Conagra borrowed $500 million in August to repay part of its debt. Philip Morris bankrolled its Swedish Match A-B acquisition with $5.8 billion in term loans.

Adobe Inc promised to finance its $20 billion purchase of designer platform Figma with stocks, cash and, if necessary, a term loan. Grocery giant Kroger followed the same path. Its mega-merger with Albertsons relies on a one-year bridge loan of $17.4 billion.

In one year, the switch to the bond market could prove beneficial.