What are the dynamics of bonds on stocks?

[beenherebefore]

One of the stocks I swing trade is Corning (GLW). I read this, which prompted some questions.

"Also late Wednesday, Corning Inc. /quotes/zigman/223221/quotes/nls/glw GLW +1.55% said it priced $750 million in debt — $500 million of 30-year senior unsecured notes at a coupon of 4.75% as well as $250 million of 25-year senior unsecured notes at a coupon of 4.70%. The Corning, N.Y.-based company will use net proceeds for general corporate purposes. The transactions are expected to be completed Feb. 21."

Is this the same thing as a bond offering? They're selling debt so this frees up more cash, so I guess they could potentally increase their dividend or could they repurchase some stock?


I don't understand..... any help would be appreciated.

[bimetalaupt]

Feb 16, 2012 14:41:11 GMT -5 beenherebefore said:

One of the stocks I swing trade is Corning (GLW). I read this, which prompted some questions.

"Also late Wednesday, Corning Inc. /quotes/zigman/223221/quotes/nls/glw GLW +1.55% said it priced $750 million in debt — $500 million of 30-year senior unsecured notes at a coupon of 4.75% as well as $250 million of 25-year senior unsecured notes at a coupon of 4.70%. The Corning, N.Y.-based company will use net proceeds for general corporate purposes. The transactions are expected to be completed Feb. 21."

Is this the same thing as a bond offering? They're selling debt so this frees up more cash, so I guess they could potentally increase their dividend or could they repurchase some stock?


I don't understand..... any help would be appreciated.

BHB,
It is just what is now know as Financial Engineering.. Remove the short term debt of the balance sheets..Esp with maturity of less then one year makes the books look better and will improve the overall credit ratings. .. it is interesting because GLW has a current ration of 4.14 and $3.85 of cash per share. It sells for about book value so they might but I think they are in a rather tough market ( TV flat glass)... The short interest of over 24 million share reflect that and give them a rather dynamic ride. Beta of 1.38 makes them very sensitive to market moves as you noted..

Good call,Just a thought,
Bruce

PS: I am not sure but many bonds are asset backed..LIKE the old T&P rail road.. The assets of the firm were worth more then the firm.

[Deleted]

Companies "Float" Debt through the Sale of Corporate Bonds. The True Affect of the Sale of this Debt is guided by among other things the Yield (%) .
All Bonds (Gov., Corp, Etc) Generally Have a Face Value of $1,000 Per.

So In this Case GLW (Corning) "Floated" Debt as such
$500 Million @ 4.75% Which Equals
500,000 Bonds @ $1,000 Face Value with a 4.75% Rate On Face
So On This Debt They Will Have to Pay $ 47.50 Per $1,000 Per Year. This Equates to a Service or "Carry Cost" of $23,750,000.00 Per Year On the Entire Debt.

They Also "Floated"
$250 Million @ 4.70% Which Equals
250,000 Bonds @ $ 1,000 Face Value with A 4.70% Rate On Face
So On This Debt They Will Have to Pay $ 47.00 Per $1,000 Per Year. This Equates to a Service or "Carry Cost" of $11,750,00.00 Per Year On the Entire Debt.

For Companies Selling Debt is another way of Financing, as opposed to taking out a Loan.
They Could Theoretically do whatever they want with the money they Raised, However Typically Companies stay fairly close to what they Say the Money will be used for in the Offering Documents.

Offering Debt in this manner can be a benefit for a company - In that It gives them Capital and Access to Funding, which Companies need. It also Gives them the Potential Opportunity later on to Buy back the Debt for Less than they sold it.

The Big Risk Is that (as always) the Company May run into an Issue Servicing the Debt later on down the Road.

But in this Environment, doing something like this could just be one of the Smartest things a Big Company like Corning Could do.

Why ? Well, Remember Bond Prices Run INVERSE (opposite) of Yield. So if Yield (Interest Rates) Go up Bond Prices come down, If Yields Fall Bond Prices Go Up.

Before you start think "oh God that could screw Corning", Pause for a Moment and Think on this -

Corning (Like most companies) "Floated" This Debt in the PRIMARY MARKET -So the Rates on the Debt that they Must pay won't change. Their Cost on the Life of the Debt is Set and Known.
The Debt will Trade in the SECONDARY MARKETS (Where You I and all Retail Investors Operate). In the SECONDARY MARKETS the Value of the Debt will Rise and Fall -Which Means You will either be able to Buy the Bonds (Debt) For a Discount to Face (Less than $1,000 Per) or For a Premium to Face (More Than $1,000 Per). This Also Means that the Yield Will APPEAR[/b] to Change Either Up Or Down.

With Debt {Bonds} you must always be aware of the COUPON (The Actual Yield) and the YIELD TO FACE (What the COUPON looks like in Relation to the Current Price of the Bond).

Now, if this isn't confusing enough - A company could "Float" the Debt in another Fashion via a "Preferred" Issue (For Example ED-A or WRS to name 2 "Preferreds).
If they "Float" the Debt Via a "Preferred" Issue, then they have a bit more Maneuvering room in the Realm of Potentially Buying Back the Debt Later for Less.

I hope this helps some. Whenever a Company "Floats" Debt it is a Complex thing.

[bimetalaupt]

D.I.,
I was reading into this statement "30-year senior unsecured notes ".. The freeing of asset they have pledged..like short term loans at the bank???

I have tried to drill down to details but can not find any real reason for the cash as there books have a lot of cash.. This will reduce the ROE.. Buy Backs The have to pay more for money then the return on investments??? 4.75% interest vs 4.3% Return on ASSETS!!!

Where did I miss it??

Bruce

[beenherebefore]

Thanks guys, I appreciate the information, you both have more knowledge than I do and Bruce, I kind of had the same question, GLW does have a nice cash balance without this......]

The new generation of ther Gorilla Glass, thinner etc, is expected to be in demand for IPOD's, cell phones, tv's, tablets etc..

I wonder whether they're going to 'make a move' or not, maybe they're looking to buy another company or maybe they're shoring up to resist a potential buy out? But that wouldn't make sense given this sale of debt........

[bimetalaupt]

Feb 16, 2012 16:07:34 GMT -5 beenherebefore said:

Thanks guys, I appreciate the information, you both have more knowledge than I do and Bruce, I kind of had the same question, GLW does have a nice cash balance without this......]

The new generation of ther Gorilla Glass, thinner etc, is expected to be in demand for IPOD's, cell phones, tv's, tablets etc..

I wonder whether they're going to 'make a move' or not, maybe they're looking to buy another company or maybe they're shoring up to resist a potential buy out? But that wouldn't make sense given this sale of debt........

Just recalled.. Samsung is spending billions on the next generation Phones... including glass???

[beenherebefore]

Yep.

[Deleted]

I have tried to drill down to details but can not find any real reason for the cash as there books have a lot of cash.. This will reduce the ROE.. Buy Backs The have to pay more for money then the return on investments??? 4.75% interest vs 4.3% Return on ASSETS!!!

Where did I miss it??

Ok, Think about it this way.

Let's say you have $1 Million Dollars. Let's Say you have $600K In Debt ( A Loan Mayhaps at a rate of 8%).
Now let's say you are a company looking to Utilize the "escape" Clause In you Loan (Pay off the Loan way early, at a reduced amount with a mild early payment penalty).
Let's say you could do that for $300K. Now let's say that if you did that you would have $700K In Cash on your Books..

Now let's assume that How your company is Valued and traded depends in a large way on How much Cash you have on the books.. And Let's say that Reducing the amount of cash could have a seriously Deleterious affect on the Price of your Stock, which then could cause a whole range of headaches..

Now Let's say you don't want to do that - But yet you want to pay off that pesky Loan ?? (Let's also assume you don't want to re-fi and that you would like an opportunity to buy the Debt back for less than you sold it for)...
How could you do that ?

You could "Float" some Debt say at a rate LESS than you are paying on the loan and then Say Use the Proceeds from the sales of this Debt for "General Corporate Purposes" ??

Meaning You Could Sell the Debt to the PUBLIC , to raise capital to Pay off a BANK, which then You Might be able to buy back at a reduced price later on down the road...

Now Let's say you were to do this in an Environment in Which the FED RATE was oh Say 0.24% and Bond Prices were Trading at say a Premium Price that due to the "Scary" Environment in which a lot of folks felt "We are doomed, the world is ending" Folks not only were willing to Pay but, pretty much BEGGED to pay...
Let's also assume that you the company Knew that the current Environment couldn't last forever and ever - and the when it changed and the FED Raised the Rates Bond Prices would come falling down..
Now let's assume knowing this you realized that "Hey I could sell $250 Million of my Debt to Investors Now, Pay off the Pesky Bank and later I will Probably Be able to buy that Debt back for Half or maybe even less....
Now let's assume (following the Logic) Knowing or assuming all that you Realize that If at that point you Use some of the Cash you have all stockpiled and Hoarded to Do that - While you tell folks "This is a good thing, We are trimming our Risk, Streamlining our Footprint, The Move will Provide Synergies That will boost profit into the Future" - That not only would folks accept that, but that they would Believe it and want to buy MORE OF YOUR STOCK, Because you are being so "prudent and acting the shareholders best interests, etc, etc, etc."

Would You the Company find it Risky ? Yes. Would it be a risk you would be willing to take ? Probably. Would it show that you the Company weren't all as scared about the Future as you had been ? Yes.. WOULD IT BE AT LEAST A LITTLE BIT GREEDY ? HELL YES IT WOULD...
BUT[/b] the old Axiom is-----

"Be greedy when others are fearful, and Be fearful when others are Greedy"

And Right now, Companies are only just starting to Get the Greedy, needy thing rocking...So a lot of Fear is still there, a lot of folks are still Fearful....

[beenherebefore]

Di, Thank you, Thank You! I get it now, you're a genius!