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Potential For Share Buybacks Post-Repatriation Worries Creditors

Fixed-income professionals are starting to express concern about the effects of the impending Homeland Investment Act with its guidelines for implementation due to come out by year-end.

Fixed-income professionals are starting to express concern about the effects of the impending Homeland Investment Act with its guidelines for implementation due to come out by year-end. They speculate foreign profit repatriation is likely in first quarter 2005 and may incentive bondholder unfriendly behavior such as share buybacks.

One high-grade investor said "the whole thing is a sham," noting he does not expect it will result in a material boost to the U.S. economy. Furthermore, he argued the legislation could actually negatively impact corporate credit. "This just increases the potential for share buybacks," he added, touching on a sore spot for high-grade investors who have recently been concerned about a corporate shift to favor equity over bondholders (BW, 10/15).

Most of the companies expected to repatriate profits are in the industrial and pharmaceutical sectors. For instance, Michael Levesque, v.p. and senior analyst at Moody's Investors Service, speculated companies including Wyeth, Schering-Plough, Bristol-Myers Squibb and Eli Lilly have not conducted many share buybacks in recent years and may use the cash they can raise cash at attractive levels from tax incentives through repatriation to do so.

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