=DJ Pimco Thumbs Dn Corp Bonds If Cos Indulge Equity Holders
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By Aparajita Saha-Bubna
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Pimco will pare down its U.S. corporate debt holdings if companies continue to reward shareholders, said the bond fund behemoth in a February research report released Monday.
While cautioning bondholders against investing in companies indulging shareholders with stock buybacks and dividend payouts, Pimco said in the report that current bond valuations aren't rewarding bond investors enough for taking on the risk of shareholder enriching initiatives.
The current average option adjusted spread, or risk premium, on corporate bonds stands at 90 basis points over comparable U.S. Treasurys - still in the vicinity of the 81 basis points at the beginning of 2005, according to the Lehman Brothers U.S. Corporate Investment Grade Index.
"Companies have been spending...on equity-friendly measures and, in the process, draining valuable cash reserves that would come in handy should economic growth slow and credit fundamentals weaken," Mark Kiesel, head of the investment-grade corporate desk at Newport Beach, Calif.-based Pimco, with over $500 billion in assets under management, said in the report.
"Cash directed towards equity holders is cash that is taken away from bondholders," noted Kiesel.
Typically, moves favoring shareholders erode the value of a company's bonds as they burden the company with more debt or make a dent in its cash holdings.
Pimco advocates in the report that companies - even those flush with cash - would do well to maintain cash-heavy balance sheets amid a likely economic slowdown precipitated by cooling consumer demand as property prices level off.
Kiesel said "...the history of the corporate bond market has shown that liquidity evaporates when companies need it most.
"Therefore, senior managers should resist pressure applied by equity holders."
Pimco will closely follow companies' use of cash, according to Kiesel, because that will likely foreshadow the fate of corporate bonds and their valuations.
That said, Pimco favors credits in the pipeline, utility, gaming and telecommunications sectors, which have hard assets and are in regulated industries with restrictions on aggressive shareholder-favoring moves. It also favors energy, commodities, and the media, cable and lodging sectors.
-By Aparajita Saha-Bubna, Dow Jones Newswires; 201-938-2248; aparajita.saha-bubna@dowjones.com |
