Attempts at Relief and Reform

Bernanke's `Cheap Money' Stimulus Spurs Corporate Investment Outside U.S.

Posted on Friday, November 19, 2010

Southern Copper Corp., a Phoenix- based mining company that boasts some of the industry’s largest copper reserves, plans to invest $800 million this year in projects such as a new smelter and a more efficient natural-gas furnace.
Such spending sounds like just what the Federal Reserve had in mind in 2008 when it cut interest rates to near zero and started buying $1.7 trillion in securities to spur job growth. Yet Southern Copper, which raised $1.5 billion in an April debt offering, will use that money at its mines in Mexico and Peru, not the U.S., said Juan Rebolledo, spokesman for parent Grupo Mexico SAB de CV of Mexico City.
Southern Copper’s plans illustrate why the Fed’s second round of bond buying may not reduce unemployment, which has stalled near a 26-year high. Chairman Ben S. Bernanke and his colleagues appear to be fueling a foreign-investment surge, underscoring the difficulty of stimulating the economy through monetary policy with interest rates already near record lows.
“You’re seeing leakage from quantitative easing,” said Stephen Wood, chief market strategist for Russell Investments in New York, which has $140 billion under management. “That leakage is going into emerging markets, commodity-based economies, commodities themselves and non-U.S. opportunities.”
U.S. corporations have issued more than $1.07 trillion in debt so far this year, according to data compiled by Bloomberg. Foreign companies also are tapping U.S. markets for cheap cash, selling $605.9 billion in debt through Nov. 15 compared with $371.8 billion for all of 2007, before the Fed cut the overnight bank-lending rate to a range of zero to 0.25 percent.
Korea, Chinese Companies
Sinochem Group, the Beijing-based petroleum, fertilizer and chemicals producer, sold $2 billion of 10- and 30-year bonds on Nov. 4. Two days earlier, state-owned Korea National Oil Corp., based south of Seoul in Gyeonggi, sold $700 million of five-year senior unsecured notes, according to data compiled by Bloomberg.
Corporate cash sloshing across U.S. borders is an unavoidable consequence of the Fed’s low-rate strategy, Wood said. Export Development Canada, the government agency that provides financing help for Canadian exporters, last month tapped the U.S. market for $1 billion in 1.25 percent notes. Those funds also will be available to support companies’ domestic activities, following a two-year expansion of the agency’s mission in 2009 to help businesses navigate the credit crunch.
“I have begun to wonder if the monetary accommodation we have already engineered might even be working in the wrong places,” Richard Fisher, president of the Federal Reserve Bank of Dallas, said in an Oct. 19 speech.
Falling Yields
Average yields on corporate bonds in the U.S. fell to 4.4 percent on Nov. 4, the lowest on record, from 10.6 percent two years ago, according to Bank of America Merrill Lynch index data.
Fisher said “far too many” large corporations told him that “the most effective way to deploy cheap money raised in the current bond markets or in the form of loans from banks, beyond buying in stock or expanding dividends, is to invest it abroad.” He didn’t name the companies.
Cliffs Natural Resources Inc., North America’s largest iron-ore producer, said in March that it would use part of a $400 million offering to repay debt associated with a Brazilian mining project. The Cleveland-based company owns 30 percent of the Amapa iron-ore mine in northern Brazil.
Finance Merger
PepsiCo Inc., the world’s largest snack-food maker, raised $4.25 billion in a four-part January debt offering to finance a merger with its two largest bottlers. The Purchase, N.Y.,-based multinational acquired the outstanding stock it didn’t already own in Pepsi Bottling Group Inc., which has operations in the U.S. and six other countries, and PepsiAmericas Inc., which in 2009 had more than 30 percent of its assets in Eastern Europe.
The deals were “primarily about strengthening our beverage business in North America rather than overseas expansion,” said Jeff Dahncke, a Pepsico spokesman. Even so, the company plans to invest some of this year’s anticipated $125 million to $150 million pretax savings from the transactions in “high-growth emerging markets,” according to a March 1 press release.
U.S. corporations’ overseas investment in the first half of 2010 exceeded the amount that foreign firms spent in the U.S. on factories and acquisitions at an annual rate of almost $220 billion, according to the Commerce Department. In the first half of 2006, the last year before the financial crisis, the net flow favored the U.S. at an annual rate of about $30 billion.
Outbound Investment
More than half of outbound investment this year landed in Europe, Commerce data show. In April, Valmont Industries Inc., which manufactures light poles and communication towers, issued $300 million in 10-year notes. The Omaha-based company said it would use the proceeds to help fund its $439 million acquisition of Delta PLC, a London-based maker of similar products.
The acquisition would add “highly complementary businesses to our existing businesses and significantly expand our footprint outside the United States, in fast-growing Asian markets and Australia’s strong, resource-driven economy,” Valmont said in a regulatory filing.
Such capital flows may help the U.S. economy over time by weakening the dollar and boosting exports, according to Richard DeKaser, an economist with the Parthenon Group, a Boston-based consulting firm.
“This is not unusual,” he said. “It’s not weird. It’s an integral part of monetary policy.”
Matthew Slaughter, a management professor at Dartmouth University’s Tuck School of Business in Hanover, N.H., agrees that overseas investment may contribute to growth.
‘Support or Complement’
“When U.S. companies expand abroad, that tends to support or complement what they do in the U.S.,” said Slaughter, who served on the White House Council of Economic Advisers from 2005 until 2007.
“Our focus is on domestic policy,” Eric Rosengren, president of the Boston Fed, said in a Nov. 16 interview. “Maybe on the margins, some companies are going to borrow in the United States and decide to invest elsewhere, but I’m not sure that would be my primary concern.”
There’s no mystery behind corporations’ interest in foreign markets. As the U.S. struggles to recover from the deepest recession since World War II, business prospects in other countries are brighter. The International Monetary Fund predicts the U.S. economy will grow at an annual rate of 2.3 percent next year, compared with 9.6 percent in China, 8.4 percent in India and 6 percent in Chile.
‘We’re Excited’
Dell Inc., the world’s third-largest maker of personal computers, said in August that second-quarter revenue from the four so-called BRIC countries -- Brazil, China, India and Russia -- rose 52 percent, compared with a 22 percent overall increase. The company anticipates spending more than $100 billion in China during the next decade, and “we’re excited about our strategic investments” there, Chief Executive Officer Michael Dell said Sept. 16.
Plans include building a manufacturing and customer-support center in Chengdu, China, and expanding Dell’s existing operation in Xiamen, the company said. The Chengdu site, scheduled to open in 2011, could grow to 3,000 workers, and as many as 500 jobs may be added in the Xiamen office.
Nine days before announcing the Chinese expansion, Dell sold $1.5 billion in 3-, 5- and 30-year notes. In regulatory filings, the Round Rock, Texas-based company said it planned to use the proceeds for “capital expenditures, advancements to or investments in our subsidiaries, and acquisitions of companies and assets.”
Company spokesman David Frink said none of the proceeds would be spent on the new Chinese facility.
“We don’t have plans to use the cash outside the U.S.,” he said.
Growth Opportunities
Stanley Black & Decker Inc., the biggest U.S. toolmaker, also is emphasizing growth opportunities overseas. In August, the company raised $400 million in 30-year bonds and said it would use the proceeds to reduce debt and for general corporate purposes. Stanley declined to elaborate, spokesman Tim Perra said.
Chief Financial Officer Donald Allan told an investor conference Aug. 31 the New Britain, Connecticut-based company would build its security business through mergers and acquisitions in Europe and Asia and saw a “great geographic expansion opportunity” in Latin America.
Issuers aren’t required to disclose where they plan to spend the proceeds from such sales. Wal-Mart Stores Inc., the world’s largest retailer, raised $5 billion last month and said it would use the money to pay off existing short-term debt and for general corporate purposes. A spokesman for the Bentonville, Arkansas-based company didn’t respond to an e-mailed question about planned investment locations.
Refinancing, Reinvesting
Tim Hoyle, vice president for research at Haverford Investments in Radnor, Pa., which manages $6 billion, said Wal- Mart is among several corporations he follows that are refinancing existing debt and reinvesting the proceeds.
“In Wal-Mart’s case, all of the reinvestment is happening in overseas markets,” he said.
That phenomenon illustrates the challenge confronting Bernanke.
“All the Fed can do is create liquidity,” Hoyle said. “What Fisher is saying is correct: The Fed has no control over how that liquidity is used.”
By David J. Lynch

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