US CREDIT-More trouble seen from share buybacks


NEW YORK, June 28 (Reuters) - Players in the credit derivatives market are not that well positioned well to profit from the growing trend of companies enriching shareholders at the expense of bondholders, an analyst said on Tuesday.

More and more companies this year will buy back shares or boost dividends, which tends to depress credit quality in a lasting way, said Gregory Peters, head of credit research at Morgan Stanley, during an interview with Reuters.

"It does matter (to bondholders) particularly over time but I don't think people are set up for this (in the credit default swaps market)," Peters said.

That means spreads in the cash and credit default swaps market may not ultimately be wide enough to compensate for this risk.

Other than troubles in the auto sector, siphoning cash to make shareholders happy has been the dominant theme in the corporate bond market this year. "Right now capital structures are really in flux," Peters said.

In a recent report, Morgan Stanley analysts recently attempted to quantify the impact on debt holders.

They found shareholder-friendly actions tend to cost bondholders nearly 40 basis points of total return over Treasuries in the following six-month period, Peters said. That is close to half the historical return over Treasuries, he added.

What's more, these bonds usually don't offer investors much rebound opportunity, unlike fallen angels which tend to get dragged lower than where they ultimately stabilize, Peters said.

"That has been the sucker trade. There is a continued sort of widening pattern," Peters said, referring to bonds that fell due to shareholder-friendly actions.

That may be because a shareholder-friendly act may be more a change in philosophy than a one-time event for a company, Peters said.

Looking ahead, companies will continue to boost their shares at the expense of their bonds because they will have trouble lifting their earnings growth, Peters said.

Profit growth has been strong in recent quarters but much of that came from falling borrowing costs and tax cuts, Peters said.

"Companies have not been knocking the cover off the ball on a fundamental basis," Peters said. "Meanwhile, they have been hoarding cash, which isn't efficient either."

Corporate executives are under intense pressure, from within and outside their companies, to do something with that cash.

Morgan Stanley uses a proprietary model to project share buybacks.

The model recently predicted half of a 200-company sample will buy back shares this year, up from 40 percent in 2004. More than a third of those companies are expected to buy back an average of 3.5 percent of their shares.



Follow Us

Sponsored Introduction Continue on to (or wait seconds) ×