Nike bond rating

 Does your company purchase the bonds of other companies as an investment?

            What is the investment grade of your Company’s bonds?

Within their Notes to the Financial Statements can you identify any discussions on financial risk?

If your Company has issued Bonds look at terms and identify the interest rates they are paying.

Find a competitor to your company and look at their debt as well. Maybe compare the 2 through a Debt/Equity ratio. Who is managing their debt structure better?

Here is a sample below

Name

Amount

 Price

Coupon %

Current Yield %

Adjusted Current Yield

Fixed Or Floating

Callable ?

YTM

Par Val.

Coup Freq.

Issued

Maturity Date

Nike 2.25%

 500M

98

2.25

2.30

2.56

Fixed

No

253

1000

Semi- Annual

4/26/2013

2023

Nike 3.625%

  500M

92.54

3.625

3.92

4.19

Fixed

No

4.07

1000

Semi- Annual

4/27/2013

2043

Nike Bond Rating is AA- by Morningstar, A+ by S&P, A1 by Moddy's

Nike Debt/Assets 5.82%

Nike bonds should be considered low risk. First the credit rating services each have

Nike’s credit rate between very good, and high quality. Specifically, Moody’s says

“NIKE's A1 senior unsecured rating reflects the company's significant scale in the global athletic industry with revenues in excess of $25 billion, the ownership of the "NIKE" brand whose distinctive 'swoosh' logo is one of the most recognized consumer brands in the world, and the company's solid track record of demonstrating revenue, earnings and cash flow growth for an extended period of time. The rating also reflects the company's strong credit metrics, very good liquidity profile, and its maintenance of balanced financial policies which we expect will continue. The rating is constrained by the inherent cyclicality and changing consumer preferences in the global footwear and apparel industries.” (Moody’s .com).

Nike bond prices are currently at a discounted price. This is evidenced by the price for each being less than par value, and that the current yield, and adjusted current yields are both higher than the coupon rate. This indicates that interest rates have increased since these bonds were issued in April of 2013 (Brigham & Ehrhardt, 2014). The coupons on these Nike bonds are paid semiannually. The Nike 3.625% bond it is benchmarked to the 20-year treasury for the bond maturing in 2043, and a ten-year treasury for the 2.25% bond maturing in 2023. An interesting feature of these bonds is that they are not callable. While having a callable option would seem like useful tool for a bond issuer to have in case the cost of capital decreased (interest rates went down). The problem when these bonds were issued could have been a competitive bond market where a non-callable feature was required to adequately market the securities as close to Par value as possible.

Looking at how the Nike bond is valued, the largest risk is an increase in interest rates. Currently the bond is trading at a discount and the interest rates are better than the coupon rates. If interest rates increased by just two percent, the bond would be even further discounted and provide almost half the return of other alternatives. The risk being that should interest rise even 2%, the owners of these bonds would be getting paid much less than a similar risk should be paying. If interest rates increased by 2%, Nike bonds would look like this:

Name

Amount

Price

Coupon %

Current Yield %

Adjusted Current Yield

Nike 2.25%

500M

87.27

2.25

2.58

4.28

Nike 3.625%

500M

72.18

3.625

5.02

6.03

Notice the current and adjusted current yields have increased, conversely if interest rates went down 2%, Nike’s bond would look like this:

Name

Amount

Price

Coupon %

Current Yield %

Adjusted Current Yield

Nike 2.25%

500M

114.9

2.25

1.96

1.97

Nike 3.625%

500M

142.2

3.625

2.55

2.57

While it does not seem realistic that interest rate will fall by 2%, it is interesting to see what a 4% spread will do to the cost of the Nike Bonds.

Looking at Nike bonds from the perspective of an investing I might say Nike’s credit is fantastic, their management structure is stable, and there are favorable terms for owners of these bonds (not callable). At the same time the coupon rate is not floating, in other words it will not benchmarked to another indicator of prevailing interest rates (Brigham & Ehrhardt, 2014). This leads to the primary risk of a bond prices decreasing for similar bonds. This concern however should be mitigated with interest rates being at historic lows. I would hover be concern about a rise in interest rates as well. While my yields would increase relative to a current price, my yield would only relate to the price I purchased the bond at. For example, if I buy the 2.25% Nike bond today discounted to 92 today I will get an adjusted yield of about 2.56%. If interest rates go up and the bond becomes worth 87.27 and the adjusted yield increased to 4.28%, my yield is still 2.56% because of where my investment was at.

References

Moody’s.com (2015). Nike Credit Rating. Retrieved October 19, 2015 from:https://www.moodys.com/research/Moody's+assigns+A1+rating+to+NIKE's+proposed+bond+issue--PR_271309

Bond Value Calculator for Interest Rate Effects on Bond Was From: http://www.free-online-calculator-use.com/bond-value-calculator.html

Brigham, E., Ehrhart, M., (2014). Financial Management. South – Western Cengage Leaning. Mason, Oh. (14th Ed.).

JWMI 531, (2015). Howe Professional Investors Value Bonds. Week 3, Lesson 1.

Morningstar.com (2015). Nike Analysis. Retrieved Various Dates From:http://www.morningstar.com/stocks/XNYS/NKE/quote.html

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