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Home Depot is one of your supervisor's clients, and she was asked to help explore the impact of a potential debt issue. The CFO and
Home Depot is one of your supervisor's clients, and she was asked to help explore the impact of a potential debt issue. The CFO and other top Home Depot managers in the finance division know that increasing the debt load will have ramifications in the credit markets. Specifically, they realize that the firm's debt rating could change, which will raise the cost of borrowing and possibly lower the value of the existing debt. No one is exactly sure what the impact will be but they all agree it deserves investigation.
Your supervisor asked you to help estimate the impact of increasing Home Depot's debt. You are to consider four scenarios: issuing $ billion, $ billion, $ billion, and $ billion in new debt. In each case, proceeds from the debt will be used to repurchase stock so the total amount of financing for the firm will not changejust the balance between debt and equity The CFO believes the $ billion level will not affect the firm's credit rating. However, each larger increase in debt will cause the debt to be downgraded by one letter grade eg from A to Baa note that other ratings systems, such as S&P and Fitch use a similar scale, but would be represented as A to BBB For example, the $ billion scenario will lower the current credit rating by one level, the $ billion scenario will lower the rating by another level, and so on Your job is determining the impact of additional debt on borrowing costs at each debt level. Assume the new debt will be raised by issuing year bonds.
Determine the current credit rating for The Home Depot.
Your supervisor suggested you research the current bond rating at FINRA by using Google to search for "FINRA market data bonds." Once on FINRA's webpage, search within Corporate Bonds for Home Depot's bonds using its ticker symbol, HD
What is Moody's bond rating on the Home Depot bond with the maturity closest to years from today? What is the yield on this bond?
At what level of debt will Home Depot's rating drop to Baaor BBB on one of the comparable scales, S&P or Fitch
The CFO is concerned about the yield spread Home Depot could be facing if it had to raise capital during a financial disruption.
Your supervisors recommended you search the St Louis Federal Reserve's Economic Data FRED website to find out what the average spread over Treasury is for Home Depot's credit rating and each of the ones below it down to Baa For example, use the "ICE BofA SingleA US Corporate Index OptionAdjusted Spread" for the spread on Arated bonds. Use data from the last years.
Calculate the peak spreads for the same ratings during the Global Financial Crisis and the COVID pandemic.
For each crisis, calculate how much extra interest, per billion dollars, would Home Depot pay at each credit rating if it had to raise capital during a similar crisis.
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