July 31, 1999
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| July 31, 1999 | atimes.com | |
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| Japan Stock buybacks may hurt bond ratings: Moody's TOKYO - A significant number of Japanese corporations are striving to increase shareholder value with stock buy-back programs, which could eventually have a negative impact on their bond ratings, says Moody's Investors Service in a new report. "The explicit strategy management takes for stock repurchases will affect the qualitative analysis, rather than the quantitative analysis of bonds and other debt instruments in the long term," stated Moody's. "If stocks are repurchased with free-cash flow, the credit rating impact would be minimal," Moody's noted, cautioning, "however, if management implements higher business and financial risk strategies to provide shareholder value, that could increase risks and have a negative impact on credit ratings." Other risks to bondholders of share buy-back programs include accelerated repurchase programs to beat the revised commercial codes' two-year deadline, which in turn could lead to decapitilization, and inflexibility which deprives management of longer-term investment perspectives. In response to 1998 revisions in the commercial code permitting stock buy-backs, approximately 870 companies amended their articles of incorporation to permit repurchasing of shares, including 40 corporations rated by Moody's, who fall into a ratings range between Aa1 and B1. The 40 companies rated by Moody's are using both profits and capital surplus to repurchase equity, but those using capital surplus to fund their repurchase programs have significantly lower credit ratings than those using profits. Companies using capital surplus have rating distributed between Baa2 to Ba3. "These issuers have a financial profile that includes a relatively highly leveraged capital structure and weak debt coverage measurements, and even though repurchase programs use a small portion of capital, the amount will impair issuers' equity position and result in further deterioration of their already relatively high leverage, and ratings could fall" Moody's warned. "We see share buy-backs as an evolving long-term risk, given that companies need to adapt to the new business environment. While this is a gradual process with no immediate rating effect, credit risk will increase over the long term," Moody's intoned. The Moody's report also discusses how 1998 revisions in the commercial code, especially the provision that companies could use capital surplus to buy back stock; has influenced equity repurchase plans. Previously, companies could only buy-back stock from profits earmarked for dividends. The report further looks at how Japanese institutional investors are responding to the increased emphasis on shareholder value. (Asia Pulse) | |||||||||
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