Tuesday, August 7, 2007

Is Home Depot's Buyback At Risk?

Home Depot (HD) had it's credit rating downgraded last month because of it's plans to tap the credit markets to accomplish it's $15 billion share repurchase plan. With the recent credit market tightening out there, will that buyback or a substantial part of it be put on the shelf?

When they announced the ambitious plan, Home Depot said they would accomplish it "as soon as practicable". Which means, well, nothing. They have announced a tender offer for shares but it remains to be seen how many people actually tender those share to the company. Moody's (MCO)did say yesterday that they may downgrade Home Depot debt even further depending on how expensive corporate lending becomes. Another debt downgrade will have the effect of making borrowing even more expensive for Home Depot.

In July, there was only $29 billion in corporate bonds issued vs $128 billion in June. The reason? Tightening credit markets have sharply driven up the cost of issuing that debt. Now, the cost still is below historic levels but that is of little consequence when you announce plans based on yesterday's levels. How has this debt figured into stock buybacks? Last year $602 billion in shares were repurchased and corporations issued a record $454 billion in cheap new debt to make those purchases. Just last month Expedia (EXPE) cut a previously announced buyback by over 20% saying "lack of available financing, on terms satisfactory to the company". Translation: It was too expensive

It bears close watching whether or another large debt supported buyback at Proctor & Gamble (PG) of $24 billion will be slowed to a crawl as the cast of it also increases.

Now, not all buybacks out there are being debt financed but it is safe to say that when a billion dollar company is buying back 20% of it's shares, a large amount of now more expensive debt is involved. Do not take those buyback plans into your thinking when deciding to purchase shares, there is a very good chance the buyback will not be accomplished now.

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