Cost of Debt?
Hi All, Kind of a dumb question here. Why, in the current interest rate environment, where Kd should be very high, are companies like L'Oreal able to finance with bonds by paying a coupon of 0.375%? I have always thought that if the firm has a bond, its Kd should be the weighted average interest paid on the bonds (not 100% correct, but should be a good proxy) , but isn't it an extremely low Cost of debt (even for an AA-rated) ?? I thought that it might be bc the bond is issued at a big discount and, therefore, the yield should be used as a better measure, but I see (https://www.boerse-frankfurt.de/bond/fr0014009ej8…) that all of L'oreal bonds have been issued close to par. I feel like there's a very easy response to what should seem like a dumb question, but any clarification would be much appreciated. Cheers,
It adds up to me. I did the math and the current YTM is close to 3.5%. That's very reasonable. The YTM when it was issued was somewhere around 0.5% however when this was issued back in 2022 the ECB reference rate was literally 0% so again, very reasonable.
I would say that in general you should not think of the coupon as the interest. What people truly care about are YTM and duration. Playing with the price at issuance and coupon rate you can craft any combination of YTM and duration that may be desirable for your company for whatever reasons. Then investors will evaluate how that particular YTM and duration combo fits into their portfolio and will subscribe appropriately.
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