Investment-grade issuers such as Clear Channel Communications, Liberty Media, Citizens Communications and Microsoft Corp. are putting excess cash to work through methods that are benefiting shareholders, in a trend that some fixed-income professionals are calling an ominous sign for bondholders. Gift-wrapped presents to equity investors such as share buyback plans and dividend payments add up to a fair amount of headline risk for bondholders, said John Tierney, credit market strategist at Deutsche Bank in New York. Generally speaking, all of the excess cash on corporate balance sheets is not going toward debt reduction, explained Michael Dineen, portfolio manager at MONY Capital Management in New York. "There is a delicate balance between shareholder and debtholder benefits. Shareholder benefits are not yet negatively impacting the bondholder on a general level, more on a name-specific basis, but I suspect that the scales will tip more toward the shareholder," Dineen added. "It's not a death sentence, but it does represent a shift away from the recent 100% focus on the bondholder," noted Marion Boucher-Soper, head of credit research at Deutsche Bank, referring to the trend. She added it is something for investors to be aware of.
Following the announcement of its share buyback plan late last month, Liberty Media's '13s widened about 15 basis points to 145bps over 10-year Treasuries. Clear Channel Communications' '13s went out about 10bps to 122bps over 10-year Treasuries after it announced its share repurchasing plan and dividend late last month. And when Citizens Communications recently issued a one-time dividend, Moody's Investors Service downgraded Citizens' 11s to Ba3 from Baa3.
Looking ahead, Tierney said he expects to see more companies use their cash to ramp up capital expenditures and merger and acquisition activity in the first quarter of 2005. He added that, if his predictions prove wrong and companies do larger share buybacks, the risk for bondholders will increase.