U.S. companies refinanced $100 billion worth of loans in January, according to S&P Global Inc. (SPGI) data reported on by The Wall Street Journal, amid favorable market conditions and expectations that interest rates will push higher in the coming months. These corporations have been able to refinance this debt at a time when investors are displaying robust demand for bank loans, floating-rate investments that frequently deliver compelling returns when borrowing costs push higher. (For more, see also: How Interest Rates Affect the U.S. Markets.)

Companies Negotiate Better Terms

In these favorable conditions, many companies have been able to secure lower interest rates on their debt, including software giant Dell Inc. (DELL), martial arts promotion company Ultimate Fighting Championship (UFC) and auto repair company Service King Collision Repair Centers Inc., according to the Journal. Since October, more than 110 companies with low credit ratings have refinanced their loans, according to figures provided by LevFin Insights LLC. 

Dell Reprices Debt

In September, Dell spent $67 billion to purchase EMC Corporation (EMC), according to The New York Times. This sum made the deal the largest technology acquisition in history. To help finance this deal, Dell borrowed $5 billion at 4% interest, the Journal reported. In January, Dell and its bankers requested a concession, asking that investors reduce the interest rate by 0.75% starting in March. To help make the proposal more attractive, Dell agreed to increase the loan's principal by $500 million and sell the debt at a minor discount. 

Service King, which has more than 300 auto repair facilities in 23 states, was able win the exact same rate reduction—of 0.75%—on its $609 million loan, according to the Journal. As a result, the company, which is owned by private equity giant Blackstone Group LP (BX) will be able to save $4.5 million in interest expenses every year, said chief financial officer Michelle Frymire. 

UFC, which was bought out in August by William Morris Endeavor Entertainment, LLC and several private-equity firms, was recently able to reprice the $1.8 billion worth of debt taken out to fund the transaction, obtaining the same 0.75% reduction enjoyed by Dell and Service King, the Journal reported. The market arms of private equity firm KKR & Co. L.P. (KKR), one of its owners, negotiated the decrease. 

Risk of Lower Returns

While these interest rate repricings may be providing companies holding debt with notable cost savings, they could reduce investor returns, according to the Journal. Because investor demand for debt is so strong, spreads could become so small that investors do not earn enough income to offset the default risk tied to the associated debt. However, these investors may have few alternatives, according to Cade Thompson, KKR's director of debt capital markets. While investors currently have a significant amount of cash, "there's not a whole lot of places they can go with that money." (For more, see also: What Investors Should Know About Interest Rates.)

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