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CREDIT COMMENTARY
Feb 21, 2013
Shareholders gain upper hand
Shareholder-friendly actions combined with macroeconomic concerns to send credit spreads into retreat on Thursday.
Leveraged buyouts have become one of the main negative catalysts for credit in 2013. But investors received a reminder today that LBOs are not the only corporate events that favour shareholders over bondholders.
US document management company Xerox raised its quarterly dividend by 35% to $0.0575 per share, the first time it has increased its payout since 2007. This will impact the firm's net free cash flow, which will in turn impinge on the company's credit standing.
Xerox's CDS widened 15bps to 192bps today, making it one of the worst performers in the US investment grade market. It already trades with an implied rating of 'BB', according to Markit data, and the persistent LOB speculation in the TMT sector could place further upward pressure on spreads.
In Europe, a quite different company also made a decision that could damage bondholders. Defence contractor BAE Systems announced that it was buying back "1 billion in shares over the next three years, on the condition that it completes the sale of 72 Eurofighter aircraft to Saudi Arabia.
Share buybacks are rarely good news for bondholders. However, in this instance the impact on BAE's credit position was small. BAE has a relatively strong balance sheet and trades in line with its BBB rating. The firm's spreads widened just 4bps to 115bps.
Shareholder-friendly actions are never welcome in the credit markets, but the real drivers of risk aversion today were macroeconomic. First, the Fed minutes released yesterday hinted that the central bank may withdraw QE3 earlier than previously thought.
Some members of the Fed's Open Market Committee appear to be concerned about the open ended commitment to buy assets. The prospect of liquidity being withdrawn from the financial system understandably sent risky assets into reverse, with the Markit iTraxx Europe widening 4.5bps to 115bps.
To make matters worse, Markit flash PMIs released this morning were well below expectations. The French PMI was particularly worrying, coming in at 42.3, a 47-month low. The figures underlined how the real economy has diverged from the financial economy, and how reliant the latter is on central bank largesse.
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