The recent spree of recapitalizations for dividend payouts or share buybacks has helped to provoke bond investors to push back, said Kevin Murphy, an investment-grade portfolio manager at Putnam Investments. “It’s happening,” he said, referring to the push from bond investors. “But it should be happening a lot more.”
Last week, bond deals for Cintas and Expedia were tweaked to meet investors’ demands. In Expedia’s first bond deal, investors wanted a higher coupon or a change of control provision, a common covenant for high-yield bonds, but not investment-grade. Expedia plans on using at least some of the proceeds of $500 million in 7.45% senior unsecured notes due 2018 for repurchase of common stock according to filings. It settled on adding a seven-year put.
Cintas investors succeeded in getting a change of control put on the $250 million in 6.15% senior notes due 2036. The company plans to use the proceeds to pay down debt, incurred in share repurchases. Murphy said he didn’t buy into either deal for credit concerns.
Standard & Poor’s has recently warned of deteriorating credit quality as a result of dividend recapitalizations. Through last Thursday, U.S. corporate issuers have borrowed $35.7 billion in loans for dividends and stock repurchase programs, according to Standard & Poor’s Leveraged Commentary & Data. In 2005, they borrowed $34.8 billion. The high-yield market has provided $2.67 billion for payouts and stock repurchases so far this year.