NXP Semiconductors, NV Is Following Your Lead: Refinancing to Lower Rates
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Large corporations aren't all that different from you or me. For example, NXP Semiconductors (NASDAQ: NXPI) is refinancing big chunks of its debt papers -- tapping into the same economic trends that inspired you or your neighbors to get a do-over on those old mortgage loans.
How interest rates inspire changes
The Federal Reserve has still not pulled the trigger on higher federal interest rates, so rates continue to hover at historical lows across the board. In response to this economy trend, consumers have taken a shine to mortgage refinance applications -- the industry metric known as the Refinancing Index is surging higher, and these loans now account for more than 62% of all mortgage applications.
So if you're refinancing right now, you're far from alone. The same financial environment also drives companies to make similar moves.
For example, NXP Semiconductors took on plenty of new debt last year, in order to finance the cash portion of the $11.8 billion Freescale Semiconductor buyout. Fast-forward to last week, and the debt market has changed enough that NXP thought that a refinancing of last year's debt papers would make sense.
What is NXP doing?
The cash-plus-shares structure of the Freescale buyout called for $2.0 billion in direct cash payments. Half of that came from NXP's own balance sheet, and the rest from brand new debt arrangements.
The company followed through on the debt requirements in June, 2015. NXP issued these two series of senior unsecured notes:
|
Amount |
Annual Interest Rate |
Due Date |
|
|---|---|---|---|
|
2020 Notes |
$600 million |
4.125% |
June 15, 2020 |
|
2022 Notes |
$400 million |
4.625% |
June 15, 2022 |
Data source: NXP.
Since then, credit ratings specialist Moody's has upgraded NXP's corporate rating from Ba2 to Ba1, with a positive outlook for further upgrades. The company now sits at the highest end of Moody's speculative-grade credit portfolios, one step below "investment grade" Baa3 ratings.
Encouraged by stronger credit ratings and low federal interest rates, NXP pulled the trigger on a refinancing last week. The new senior notes look like this:
|
Amount |
Annual Interest Rate |
Due Date |
|
|---|---|---|---|
|
2022 Notes |
$1,000 million |
3.875% |
September 1, 2022 |
Data source: NXP.
These new bonds will be used to pay off the remaining $960 million balance on the two debts listed earlier, plus refinancing fees and other general corporate expenses. The interest rate is lower, and two bonds have been simplified to a single series.
The lower interest rates work out to $4.5 million of annual interest savings. It's not a huge slice off of NXP's $412 million in annual interest expenses or the revenue run-rate of nearly $10 billion, but every little bit helps.
So NXP's refinancing isn't much of a game-changer. The company is just tightening a few financial nuts and bolts while the low interest rates last. Kind of like you running through another refinancing just to lock in those interest rates a few notches lower. The old loan wasn't exactly bad, but wouldn't it be irresponsible to miss out on even better choices?
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Anders Bylund has no position in any stocks mentioned. The Motley Fool owns shares of and recommends NXP Semiconductors. The Motley Fool recommends Moody's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.