There are a few ways that a good company can do to take advantage of a recession. One of the things that are sometimes done to try and boost the economy is for interest rates to be lowered making it easier for companies (and people) to borrow money. Rather than borrowing to go into more debt a company can actually borrow money and use it to pay off higher interest debt that they had previously had allowing them to save money and increase the time available for them to pay off this debt.
This is exactly what Penske Automotive Group (PAG) did when the redeemed their 5.75% Senior Subordinate notes that were due in 2022. The principal amount of these notes was $550 million. The redemption was almost entirely funded by the proceeds from the issuance of $550 million of 3.5% Senior Subordinate Notes due in 2025. This is a very good thing for Penske for a couple of reasons. It reduces Penske’s future interest expense by approximately $12 million annually and it extends the maturity of their senior subordinate debt by an additional 3 years.
Penske announced that they had done this on October 1st and since that time their share price has really reflected the positive sentiment of shareholders in regards to their debt extension at a reduced interest rate. October 1st Penske opened at $48.07 and their most recent closing price was $52.62.
This is just one of the ways a company that has good credit and is in a decent position financially can take advantage of the current environment with Covid 19. Companies with good credit will generally have 3-5% interest rates on their notes while companies that have poor credit ratings will generally be in the 5-7% range with their notes.
Conveniently enough since I finished this article last night but hadn’t posted it yet Penske just made a pretty big announcement today as well. They just announced that they were reinstating their quarterly dividend of $0.42 per share, which they had halted in May due to the pandemic. The improving market outlook and solid financial position Penske has managed to put themselves in has allowed them to bring back their dividend much sooner than I think most people expected. The last time Penske cut their dividend they didn’t reinstate it for 2 years. The dividend is payable on December 1st to holders of record on November 10th.
Disclaimer: I am currently long on Penske Automotive Group. All prices are as of October 14, 2020.