Several corporations tilted the balance of favor toward their equity holders this year by selling debt to pay for share buybacks and equity dividends, a trend that bodes poorly for creditors as the economy heats up and companies seek to bolster their share prices. The corporate re-prioritization is seen as one of the major themes of 2004 because it marked a decided shift in sentiment away from bondholder interests.
Share buyback and dividend plans from issuers such as Citizens Communications, Clear Channel Communications and Liberty Media sparked concern the scales were tipping away from bondholders (BW, 8/2). HCA Inc.'s subsequent $2.5 billion equity buyback, which was funded by debt issuance, prompted its downgrade to junk by Standard & Poor's. It also heightened concern bondholder-unfriendly behavior was a major threat to the market since the hospital operating company, which has more than $7 billion in debt outstanding, is one of the largest issuers in the high-yield universe (BW, 10/18).
But one high-grade portfolio manager pointed out the HCA incident, though "horrific," is an extreme example and noted the use of excess cash for share buybacks and other shareholder-friendly behavior is perhaps better than alternatives such as poorly executed merger and acquisition activity.
Market participants expect shareholders to remain the favored child heading into 2005. John Tierney, credit strategist at Deutsche Bank, predicted companies will be confronted with what to do with growing cash reserves during the first quarter of next year. They will either raise capital expenditures and hiring activity or return cash to shareholders, he said, noting he anticipates the latter outcome and shareholder-friendly activities to continue.