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Brown-Forman to Bring Down Debt

Zacks Equity Research

In order to lower interest payout on borrowings, Brown-Forman Corporation (BF.B) recently announced that it would redeem its $250 million of 5% senior notes on Feb 25, 2013. A combination of available cash and short-term borrowings will used to fund the redemption.

The strategy signifies the company’s ability to generate cash flow, which will be utilized to bring down debts, leading to reduction in interest expenses.

The redemption of the senior notes, which are due in 2014, will result in a pre-tax interest savings of about $2 million and $8 million in fourth-quarter of fiscal 2013 and fiscal 2014, respectively. However, it is expected that the company will bear a pre-tax expense of approximately $9 million related to the redemption in the fourth quarter.

Borrowing costs have gone down significantly, helping the companies to obtain easy financing at compelling prices. Corporate bonds and borrowings from banks are in high demand as the U.S. treasuries are yielding low rates.

On Dec 12, 2012, Brown-Forman completed its offering of $750 million unsecured senior notes. According to the company, the notes were offered in three different tranches having distinct maturity dates. The first $250 million notes, carrying an annual interest rate of 1.00%, will mature on January 15, 2018. Another $250 million worth of senior notes, which were issued at an annualized interest rate of 2.25%, is due on January 15, 2023. The last $250 million of notes carry an annual interest rate of 3.75% and maturity date of January 15, 2043.

Debt offerings of big companies are being oversubscribed, providing corporations the option to price offerings at lower rates. Hence, several companies are coming up with debt offerings to lower interest expense either by refinancing outstanding borrowings or redeeming the higher interest bearing debts. Earlier this month, Staples Inc.(SPLS) announced the simultaneous offering and redemption of debt to reduce interest expenses.

Moreover, some companies are offering debts to finance long-term investments, such as PVH Corporation (PVH). In late Dec 2012, the company had issued $700 million of senior unsecured notes to pay a portion of the cash consideration related to the acquisition of The Warnaco Group, Inc. (WRC).

Currently, Brown-Forman carries a Zacks Rank #2 (Buy).

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