Long term funding requirements are oft obtained through lines of credit which, under normal market conditions, may be quite expensive. With UK and Euro interest rates set to increase the cost of lines of credit are set to rise also – both protractedly and, perhaps, somewhat sharply ( especially in the Euro zone ). It is against this background that companies, especially those whom leveraged up during the low interest rate periods, are now finding themselves.
A further option for long term funding may be obtained through the issuance of corporate bonds. In certain instances corporate bonds may have been bestowed a higher credit rating than the country that the company is based in, as was the case of Unilever bonds ( the company ) versus the credit rating of England ( the country ) during part of 2009.
The following table summarises the three outstanding Tesco bonds. The bonds are not particularly cheap as discussed in this article which compares the 5.2% issue with Tesco stock (http://www.gurufocus.com/news.php?id=125725 ). However when researching companies to hold for the medium or long term, it’s vital to research the funding positions which allows the company to grow. Accordingly you can be sure that Warren Buffett has cast his eyes over the following bonds:
Year Low ( Price )
Year High ( Price )
Current Offer ( Price )
14 Dec 1999
21 Feb 2011
13 Dec 2002
14 Dec 2029
24 Aug 2018
13 Dec 2019
The 5.50% NTS and the 6% NTS bonds which are very similar in feature apart from their maturity and coupon value. However Tesco, or rather Tesco Bank, introduced a different model of bond, to raise funding for the bank’s development. There is no year high/low price as the bond is only a little over 3 weeks young. Note the lower coupon value due to lower interest rates. Note also the twice yearly coupon frequency and the lower minimum denomination.
This change in bond model neatly reflects the change in Tesco’s top guard. Gone now is Terry Leahy whom is replaced by Phillip Clarke. Let’s hope, for the 5.20% bonds sake, that Clarke will buy money cheaply and lend it at high rates.
Disclosure: Long Tesco Stock