Friday, February 10, 2017

Government Junk

Almost seven years ago, I told you to throw out the Corporate Finance textbook, where it is written as gospel that sovereigns (the serious ones at least) are better credits, i.e. more "riskless", than corporates.  I said that was changing.
Frankly, I see less risk in any number of institutions with names like Colgate-Palmolive, Johnson & Johnson, IBM, Proctor & Gamble, Clorox etc. In today's world, these are the less risky bets and the US government ought to pay me a premium for capital that I could otherwise tie up in the equity of these institutions....What type of institution will act with speed, wisdom, and effectiveness? Shouldn't you pay more for these qualities and less for the lack of these attributes? I believe so, and I think this will be the new reality a few years down the road.

Lo and behold, from Bloomberg today: "It's a Bad Sign When Unilever Yields Less than France"
Do you prefer Marmite debt over La Belle France?
Unilever NV, with its A1/A+ credit rating, managed a yield of just 1.03 percent for the 600 million-euro ($641 million) 10-year bond it issued Wednesday. France's Aa2/AA rating doesn't seem to be doing it much good, since its 10-year yielded a few basis points more at the time. 
Unilever is at least cash flow positive whereas France does have an ever-expanding deficit, but is the market really saying that Unilever has greater placement control of toiletries than a major European sovereign has in raising taxes?
Who could have seen this coming??


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