Why You Should Expect Improved Profit Margins on Rebound

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An often overlooked benefit of a recession is that it becomes far cheaper to borrow than ever before.  In moving forward, this presents an opportunity for corporations to bring today’s low rates into the future.  Remember, though bonds may rise and fall in cost with time, the original price – or the price at which investors were willing to buy debt from corporations – stays the same.

Moving On

Companies with huge debt loads are obviously looking into a dramatic refinancing effort.  At no time in history are corporations better positioned to borrow at rates most often reserved for triple A rated nations.  By issuing debt now at 4-5%, they will continue to pay 4-5% forever, regardless of how high rates go in the future.

This feature of the debt market is often overlooked by investors because the returns investors receive for investing can go up or down in the short term, though the rate stays standard by the maturity date.  We suspect that this recession will be no different.  As rates rise, investors will worry, even though today’s low rates were already locked in.

Look at the Issues

Companies are on track to issue more debt in 2010 than they have since 2006, when rates were just slightly higher than they were today.  For companies with a high return on equity and thick profit margins, the eventual recovery will be even better than for larger firms with thinner ROE figures.

Of course, this requires the proper utilization of cheap cash, but with rates as low as 4% for AAA rated debt, it should be obvious that virtually every corporation will be able to churn a profit on such inexpensive money.

Cashing In

Investors will obviously have to wait for any eventually recovery, which as history suggests will happen.  Now it’s just a matter of when.  The recovery may not be so far off, however, as Americans have started building their cash reserves by pushing the American savings rate above zero and refinancing debt at historically low prices.  Even on the consumer side, today’s low rates are being extended as far out as 30 years in the future through home mortgages.  When bank accounts are satisfied, be sure to know the American consumer will be out to shop again!

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