NEW YORK, Feb 28 (IFR) - Investors are turning a blind eye
to shareholder-friendly activity by borrowers, as ballooning
portfolios make the once heated topic of leveraging up to buy
back stock a barely acknowledged risk when it comes to pricing
In the past week close to USD30bn of orders poured in for
USD10.35bn of bond issuance by Cisco, PepsiCo
and Juniper Networks.
The three corporates came to market either to raise funds
for share repurchases or, in Pepsi's case, to pay down
commercial paper ahead of what analysts expect will be more CP
issuance to help pay for its planned USD8.7bn buyback and
dividend payout to shareholders this fiscal year.
Traditionally, the sight or threat of a company increasing
leverage for shareholder-friendly purposes would have sounded
alarm bells, or at the very least required issuers to pay up for
But that was not the case for Cisco, which priced USD8bn in
a seven-tranche deal with zero to just 5bp of new-issue premium;
nor for Pepsi, which raised USD2bn of threes and 10s 2bp-4bp
inside comparables; nor for Juniper, Cisco's smaller competitor,
which issued USD350m of 10-year notes more than 12bp tighter
"It has gotten to a point where it's commonplace for bonds
to not require too much new-issue concession to compensate for
things like [shareholder-friendly actions]," said Scott Kimball,
senior portfolio manager at Taplin Canida & Habacht, part of the
BMO Global Asset Management group.
For investors, the biggest concern is whether a capital
return to shareholders could cause a downgrade. But in today's
market, that downgrade has to be a dramatic one that involves
dropping out of a rating category altogether for it to raise red
"Generally, if a company keeps its ratings in the same
ratings category [a downgrade] isn't that big of a deal and many
investors will look the other way," said Michael Collins, senior
portfolio manager at Prudential.
Most of the six share-repurchase related negative rating
actions taken by Fitch on US corpoates last year were in the
triple-B rating category, compared with a single-A/double-A
dominance of similar negative rating actions in the previous two
"This highlights the fact that even triple-B rated issuers
currently face little cost in terms of market access or
borrowing rates from moving one or two notches down the rating
scale," said Philip Zahn, senior director in corporate ratings
With bond mandates for refinancing slowing, underwriters in
the high yield market are also pushing the leveraged share
buyback idea hard, and especially while they can point to yields
near record lows and interest rate stability.
But in high yield, investors can at least ask for greater
protection than what's available in investment grade.
"In a market like this where shareholder activism is so
prevalent, we think bond covenants are really important," said
Stephen Kotsen, a high-yield portfolio manager at Nomura Asset
Some analysts warn that Pepsi might sacrifice a notch in
rating if activist Nelson Peltz succeeds either in securing even
greater capital returns than the company is already committed
to, or even in forcing a break-up of its snack and beverage
"With a goal of maintaining Tier 1 commercial paper access,
we think PepsiCo can push the limits on its
shareholder-enhancement plans and sacrifice its A1 senior
unsecured rating at Moody's to target a mid A senior unsecured
rating profile," said Edward Mui, a credit analyst at
But having received nearly USD18.5bn of inflows so far this
year, investment-grade fund managers can justify taking on a
stellar brand name and infrequent issuer such as Pepsi,
downgrade and break-up threat or not.
"People are sitting on so much cash right now that I think
in terms of all of the possibilities of potentially negative
news that could occur with a company, leveraging up for share
buybacks is not quite as punitive as a major acquisition - or,
worse, an LBO," said Steven Oh, head of global credit and fixed
income at PineBridge Investments.
But what has made funding cheap for share repurchases has
also heightened the potential for acquisition-event risk, argues
"There's a disconnect as to how people are perceiving risk,"
he said. "Just because corporate America has a lot of cash,
cheap financing and all that good stuff, doesn't mean the risks
have decreased. What if the share buybacks don't do enough and
stock prices continue to slump?
"The point is that only looking in the rear-view mirror does
you no favors. You have to worry about what the company will
look like three years from now and make sure you are getting
paid appropriately today for the risk."
For the moment, however, it appears that as long as they
have some clarity on the magnitude of shareholder agitation,
investors are willing to come in to bond issues.
A crucial reason for the deluge of orders for Juniper's
deal, meanwhile, was the fact that it had swiftly bowed to
activist pressure from Elliott Management the week before, by
agreeing to a plan to return USD3bn of capital over the next
"Bond investors hate not having clarity, so if a borrower
gives them that, then they will be fine, because they can work
out valuation," said one banker.
Keeping the deal small helped to drive in that valuation. A
banker close to Juniper said the firm had decided to raise only
USD350m to supplement cash on hand set aside to pay for a
USD1.2bn accelerated share repurchase that is part of the
capital return plan's USD2bn of stock buybacks.