Bond investors in the US and Europe have been gobbling up ever-dicey issues as memories of past credit catastrophes have begun to fade. Issuers have dropped or loosened covenants, done away with some call protection and generally held the whip hand. Nonetheless, companies that tinker with their capital structure to benefit shareholders at the expense of their credit rating still face some pushback.
Take Xerox. The company, subject of speculation about its potential as an LBO target, raised its quarterly dividend by 35 percent February 20. That’s almost six cents per share sucked out of its net free cash flow, enough for its shaky credit standing to take a hit. On cue, its CDS widened by 15 basis points on the news, making it one of the worst performers among investment grade companies that day, according to Markit.
Markit analysts highlighted another example that same day – the decision by BAE Systems to undertake a GBP1 billion share buyback over three years. However, BAE’s strong balance sheet limited the damage; its spreads only widened 4 bps.
The credit markets could remain welcoming for some time, given the surfeit of money sloshing out of the developed world’s central banks these days. Even so, corporates have to take some account of lenders’ concerns, or when the market worm finally turns, they could find themselves bitten.