NEW YORK, Sept 6 (IFR) - Issuing bonds to fund share
buybacks, a key theme in the US corporate market over the past
18 months, is unlikely to fall out of favor with corporate
treasurers any time soon despite the back-up in rates which
should, in theory, make such deals less attractive.
This week saw four retailers - Home Depot, Lowe's
Companies, Kohl's and Macy's - issue
bonds to at least partly finance share repurchases.
They follow a host of other issuers, including Merck
and Viacom, that have both issued multi-billion bonds
this year to boost their share prices.
With 10-year Treasury yields now flirting around 3% - their
highest levels since July 2011 - some companies, especially
those with low dividend yields, may find such deals harder to
But for the majority, bankers say the number one priority is
to appease frustrated shareholders, who have been placing
increasing pressure on corporates to use the bundles of cash
sitting on balance sheets to boost their returns.
"When rates go up, any kind of debt financing becomes less
attractive, but on a historical basis rates are still very low,"
said Jim Turner, head of debt capital markets at BNP Paribas.
"If a company has debt capacity at its current ratings, and
it makes sense from a capital optimization point of view, share
repurchases with bond proceeds still make good sense."
Apple is regarded as the poster child for such
deals, with some market participants expecting the company to
issue as much as USD50bn of bonds over the next three years to
finance share repurchases unless it employs alternatives to that
In total, US companies have announced USD309bn worth of
share repurchases year-to-date, up from USD259bn for the same
period a year ago, according to Thomson Reuters data.
Two other bankers that have worked on a number of these
deals this year, said the trend was unlikely to stop dead in its
"If a company is able to issue a bond at a level where the
after-tax basis still looks cheap to the dividend yield, then
issuing bonds to fund share repurchases is attractive," one
Home Depot, for example, rated A3/A-/A-, issued its triple
tranche USD3.25bn deal, split between a 2.25% USD1.15bn 5-year,
a 3.75% USD1.1bn 10.5-year and a 4.875% 30.5-year, on Tuesday.
The order book was heard to be just shy of USD13bn, which is
no surprise for a company that has weathered the economic
downturn better than most of its peers, and is now benefiting
from the recovery in the housing market.
Home Depot used just over a third of the proceeds, or
USD1.25bn, to refinance more expensive 5.25% senior notes, but
the bulk was for the company's well-flagged share repurchase
program. As a result, even though the company's dividend yield
is relatively low, the deal still makes sense for the issuer.
Home Depot repurchased USD4.3bn of common stock in the
six-months to August 4, up from USD2.85bn for the same period a
year earlier, as well USD3.2bn via two accelerated share
repurchases in the first half.
The company's current dividend yield is around 2.1%. The
average coupon on its latest bond issue, meanwhile, after tax
deductions, is around 2.47%, according to the banker.
There's no denying, though, that Home Depot's debt financing
costs, like all issuers, have increased over the past six
It paid a coupon of 3.75% on its 10-year this week, compared
to just 2.7% on a similarly sized deal issued in April.
"100bp is a significant increase in the mindset of most
corporate treasurers," said another debt capital markets banker.
"When you're locking in rates below 3%, bond-funded share
buybacks look attractive, but as those rates start to rise, that
needs to be weighed against other uses of capital."
The one factor that could well quash the trend is a rise in
M&A, but even that, bankers say, is not on the horizon just yet.
"If a company is not using its debt capacity for
acquisitions, then it is more likely to use it for share
repurchases. So if M&A does pick up, we could see share
repurchases fall," said Turner.
Verizon's acquisition of Vodafone's 45% stake in
Verizon Wireless, has helped push worldwide announced M&A
activity in the telecoms sector to USD231.6bn so far during
2013, its highest year-to-date level since 2006, Thomson Reuters
Announced M&A across all sectors now totals USD1.547trn so
far during 2013, up 1% over last year at this time. But even at
those levels, activity is still way below its peak.
"One of the factors that helped drive the Verizon deal, was
the cost of debt. Bond supply has been predominantly driven by
refinancings, and there's no clear signal yet that M&A is going
to pick-up significantly," said another banker.
"Whether rising rates could be a catalyst for M&A remains to