Mish's Global Economic Trend Analysis Message Board

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Strategies & Market Trends : Mish's Global Economic Trend Analysis

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To: Haim R. Branisteanu who wrote (15929)	11/16/2004 12:01:03 PM
From: mishedlo	of 116555

A snip from Brian Reynolds on corporate bond action. We wrote last week about how, when a company plans a stock buyback, it will normally borrow the money first, then announce a buyback once the funds are in hand and the bondholders are unable to do anything about it. We wrote how that has now changed and bondholders are acting as if they just don’t care, feeling that balance sheets have improved enough in recent years to withstand buybacks, with the results being that we've actually seen some companies announce buybacks, and then borrow the money, with bond investors lining up to provide funding. We saw a new twist on that yesterday: A junk-rated company announced that they will be accessing the bond market to fund their previously announced buyback. It was only two years ago when it was news if bondholders decided to let a company access the market for a life-saving rollover of maturing debt. Now, this company is totally confident that they can access the junk market solely to weaken their balance sheet in order to boost their stock price, and they could be correct. We’re not identifying the company because we don't want people to focus on this particular company; we want people to focus on the fact that bondholders are throwing money around like crazy. We need to watch for signs that bondholders will change their minds and pull in their horns. So far, though, there has been no reaction in the agency and swap markets to FNM’s lack of an earnings release and admittance that they may have to take a write down. So, until further notice, it looks like the trends we have been noting will likely continue.

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