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Who needs growth when you can borrow on the cheap? Print E-mail
Friday, 27 November 2009

By Matthew Quinn

Corporate borrowers have sold nearly $1.18 trillion in bonds so far this year, already besting the annual record set in 2007, Bloomberg News reported. But how they're going to use the funds to improve their financial outlook is still unclear.

Companies raised roughly $97 billion in November through debt sales. One company that tapped the market this month was Cisco. The network equipment maker was sitting on more than $35 billion in cash and investments on October 24, according to a recent filing with the Securities and Exchange Commission. Net income was down nearly 19 percent for its most recently completed quarter on a sales decline of more than 12 percent.

But even with the high cash balance and questionable growth prospects, Cisco raised $5 billion in debt. Tough to blame it, though, considering the low cost. Demand was strong for the three-part issuance, with the $500 million five-year note selling at 67 basis points over Treasurys, the $2.5 billion 10-year note at 100 basis points over Treasurys, and the $2 billion 30-year note at 130 basis points over Treasurys, Dow Jones reported.

Even though the proceeds were designated for general corporate purposes, Cisco could be using the funds for its cash bid for Norwegian video-conferencing maker Tandberg, which it recently raised to $3.39 billion. So at least Cisco is making a play at growth, which is more than others can claim.

"It's unclear to me that a lot of it is for real strong capital investment and for growth," Lon Erickson, who helps oversee $4 billion in fixed-income assets at Thornburg Investment Management, told Bloomberg in regard to the record issuance this year.

Financial engineering is often used to buy time while management tries to figure out a real plan. Let's hope they come up with something soon.

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