Shareholders trump bondholders

In bull markets shareholders often have the upper hand over bondholders, and there were two classic examples in the US today.

Viacom, the owner of TV channels Nickelodeon and MTV, announced that it was doubling its stock buyback programme to $20bn, about half its market capitalisation. It also said that will acquire an additional $2 billion in shares "in the next few months", considerably more than the typical $500-$750m it buys every quarter.

Shareholders were understandably pleased - the stock price was up about 6.5% - but bondholders were less enamoured. Viacom's CDS spreads widened 20bps to 75bps, the largest daily deterioration since May 2009 and a massive move for this relatively stable credit.

Viacom is a solid BBB credit - it trades with an implied rating of "A', according to Markit data. Its net debt/Ebitda ratio is less than 2x, suggesting that the company has some breathing space and can afford to reward shareholders. However, the change in financial policy is still a concern for bondholders and the balance sheet weakening inevitably led to spread widening.

The TMT sector provided another case of shareholder preference today. Computer maker Dell has been the subject of a long-running takeover battle since January, and there were doubts that founder Michael Dell would achieve his aim of taking the company private.

But events turned in his favour today after a special committee of Dell's board agreed to a sweetened deal and in return changed the shareholder voting rules. The latter move removes a major obstacle and makes it far more likely that shareholders will approve the deal.

Again, the equity market welcomed the news. Dell's stock price rose 5.2% and has risen more than 35% since the deal was first mooted earlier this year. The reaction in the credit market couldn't have been more different. Dell's CDS spreads widened 73bps to 406bps, a level some 226bps wider than where it was trading in January.

The dramatic credit deterioration is down to the high leverage in the buyout and the inevitable balance sheet fragility that will follow. Dell trades with an implied rating of "B' but is rated "BBB', a reflection of the probable downgrade to junk, if and when the deal is completed.

Perhaps we will see more shareholder-friendly actions if the bull market continues, though the Viacom and Dell announcements didn't prevent stock markets going into reverse today. Investors were struggling to digest a mixed non-farm payrolls report, with fewer jobs created than expected, but unemployment falling to 7.4%.

Lower labour force participation was partly responsible for the latter, so overall it was a mildly negative report. The timeframe for QE tapering may now be pushed back, which is positive for risk assets, though the slow pace of the US recovery is still a concern.

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