Corporations anxious to improve their balance sheets are selling record amounts of equity to pay back bonds and loans — rather than stock — which has implications stock prices and future dividends.
"Stock buybacks are a thing of the past: It's reducing debt and bond buybacks that are in vogue," Kathleen Gaffney, co-manager of the Loomis Sayles Bond Fund told Bloomberg.
"Stocks aren't going to move and earnings aren't going to move without a healthier balance sheet."
Corporate debt loads rose in 2006 and 2007 as companies borrowed to repurchase stock and boost shareholder returns when borrowing costs were at all-time lows.
Over 165 companies raised a record $87 billion in U.S. secondary share sales this quarter, and 77 percent of them used the proceeds to slash leverage.
More U.S. companies are diluting existing owners as well, reducing the median debt-to-equity ratio for high-yield, high-risk corporations from 66 percent to 54 percent since February and from 39 percent to 32 percent for investment-grade debtors as of June 12, according to Moody’s Corp.
With speculative-grade securities gaining about 30.4 percent over recent months, corporate borrowers are also refinancing maturing debt in the bond market, selling a record $682 billion of offerings in the U.S. this year.
Nonetheless, shorter-maturity U.S. corporate debt, which posted its best monthly return in more than 20 years, is still a good deal as frozen credit markets thaw, according to money manager Greg Haendel.
“There still is an immense amount of opportunity in the short end for investors who can do solid credit analysis on those names where the baby got thrown out with the bath water,” Haendel told Bloomberg.
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