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Brown-Forman Redeems $250M Notes

Zacks Equity Research

On Monday, Brown-Forman Corporation (BF.B) concluded the earlier announced redemption of its 5% Notes worth $250 million. This Zacks Rank #4 company utilized its available cash and short-term borrowings for redemption purpose.

The strategy signifies the company’s ability to generate cash flow, which has been used to bring down debts, leading to reduction in interest expenses.

The redemption of the Notes, which were 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 has incurred a pre-tax expense of approximately $9 million related to the redemption.

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 Jan 15, 2018. Another $250 million worth of senior notes, which were issued at an annualized interest rate of 2.25%, is due on Jan 15, 2023. The last $250 million of notes carry an annual interest rate of 3.75% and maturity date of Jan 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.

Over the last 2-3 months, several companies including FelCor Lodging Trust Inc. (FCH) and Staples Inc. (SPLS) completed offering and redemption of debt simultaneously 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.

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