Corporate News: More Companies Borrow Short-Time
After working since the credit crisis to push back the time at which their debt comes due, American corporations are now taking on more short-term risk.</br></br>Concerns that the Federal Reserve will soon begin to dial back the flow of easy money has pushed up the cost of borrowing longer-term funds in recent months. But since the Fed hasn't actually moved to raise interest rates and isn't expected to for a while, short-term funds remain incredibly cheap.</br></br>That gap has created opportunities for some companies to borrow more short-term cash to buy back stock, help fund acquisitions, or pay off longer-term debt. Other companies are entering into derivatives deals with banks to get more exposure to floating interest rates, or to profit from a widening gap between short and long-term rates.</br></br>The bet is that rates will remain low enough and markets liquid enough that companies will be able to keep borrowing when their short-term loans come due. It is a pretty safe one, given that the Fed is expected to keep its benchmark interest rate close to zero for at least another year. Still, the moves highlight the distortions that have been created by the central bank's deep intervention into the markets.</br></br>Before the downturn, companies typically funded a lot more of their needs with short-term borrowings. During the financial crisis, when banks were in trouble, short-term borrowing costs for many borrowers spiked and parts of the credit markets nearly came to a standstill. Some companies moved to reduce their reliance on commercial paper and short-term IOUs due to concerns that these avenues of funding could freeze up during times of market stress. And as the Fed pushed interest rates to rock-bottom lows and bond yields fell, companies issued more bonds and longer-term loans, locking in low rates for years.