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As Lenders Shun Euro Zone, Blue Chips Borrow for Next to Nothing

And you don't have to be AAA to get all the cash you want


Sovereign debt woes in Europe have gone from bad to really bad to catastrophic. Greece had to be bailed out since lenders didn’t trust the country enough to extend credit, and Italy just had to pony up exorbitant rates of nearly 8% to sell three-year government bonds.

Even Germany is feeling the pain with a bond offering last week that was badly undersubscribed — with bids accepted for less than two-thirds of a 6 billion euro issue (almost $8 billion U.S. dollars). The norm is around 90% subscription to German bond offerings.

It’s enough to remind investors of the credit freeze in 2008, where lending ground to a halt and banks were reluctant to lend to each other, let alone to businesses and consumers. The result was a massive bailout to prop up liquidity and confidence — but even that couldn’t stop the market crash that soon followed the financial crisis.

But lest you stock up on canned goods and head for your bunker, consider this: While Europe is struggling to finance its debt and many Americans are still crippled by underwater mortgages (and other bills they can’t afford without a job), U.S. corporations are borrowing to their hearts’ content.

And they’re not just borrowing. They’re raking in cash at rock-bottom rates that equates to free money when you consider the current rate of inflation is creeping up on a 4% annual rate. For Pete’s sake, the cost of Thanksgiving dinner was up 13% this year!

That means you would be stupid not to borrow money at rates of just a few percentage points or two.

Here are four companies that did just that on Tuesday:

John Deere (NYSE:DE) executed a two-part $1.1 billion offering that included three-year bonds priced to yield a little under 1.3%, and five-year bonds yielding 2%. This was the seventh bond sale of 2011 for Deere — indicating the company isn’t afraid to tap into credit markets while it can enjoy these rates. Deere’s credit is rated single-A by Standard & Poor’s — the fifth-highest rating, and hardly elite. It just so happens that Italy is also rated single-A after a September downgrade (though unlike Deere, the outlook is “negative”).

Also on Tuesday, Disney (NYSE:DIS) offered investors a two-part bond deal that included $1 billion three-year notes priced to yield a hair under 1%. Disney also garners a single-A rating from Standard & Poor’s.

Auto parts giant Johnson Controls (NYSE:JCI) joined in the bond blast this week, too. JCI sold $1.1 billion in a three-part deal featuring five-year, 10-year and 30-year maturities. The five-year notes were sold at 2.6% yield, while the 10-years were sold at roughly 3.8% yield. JCI gets an even lower BBB+ rating from S&P — still investment grade, but just a few steps above “junk” status.

Aerospace and defense contractor Raytheon (NYSE:RTN) sold $1 billion of three-year and 30-year bonds for “general corporate purposes.” The deal included $575 million three-year bonds that yield a tad more than 1.4%, and $425 million in 30-year bonds yielding about 4.8%. Raytheon’s credit rating from S&P is A-minus — better than Johnson Controls, but worse than Deere and Disney.

We shouldn’t begrudge companies the right to borrow money at low rates, especially since bondholders are the ones sticking their necks out by lending to these four blue-chip stocks, and will be left holding the bag if these investments sour. But it’s a bit disturbing that while Wall Street is so fearful of sovereign debt, these companies with rather middling credit ratings can raise boatloads of cash without a hitch.

You have to wonder: Is Wall Street overly pessimistic about euro zone debt and simply causing borrowing rates in Europe to spiral higher and higher without cause? Or on the other hand, are bond traders a bit naïve about how “safe” corporate debt is in American companies and settling for much smaller yields when they deserve higher rates of return for the risks they’re taking on?

It’s quite possible that neither is true. After all, even after the S&P downgrade of U.S. debt we saw Treasury bonds remain very popular — simply by virtue of being “less bad” than alternatives. Investors are scared amid stock market volatility and euro zone upheaval, and there aren’t a lot of alternatives right now. Lending to blue-chip corporations may be the next best thing, especially now that the congressional supercommittee has failed miserably to reach a compromise aimed at resolving at least some of Uncle Sam’s budget woes.

Whatever the reasons, it’s hard to deny that Deere, Disney, Johnson Controls and Raytheon are making the right decision to take advantage of super-low borrowing while it lasts.

Of course, let’s not fool ourselves into thinking these funds are going toward job creation or big growth plans. More likely these blue chips are raising funds right now simply to hoard cash in their rainy day funds, to acquire smaller competitors and buy back their stock to boost earnings per share numbers.

Cheap debt may wind up being good for investors and the balance sheets of these companies, but not much else — at least in the near-term.

Jeff Reeves is the editor of Write him at editor@investorplace?.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. As of this writing, he did not own a position in any of the aforementioned stocks.

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