US investment-grade debt issuers have accelerated their share repurchase programs, generally leading to weakening credit profiles and limiting financial flexibility should market conditions weaken, according to a Fitch Ratings report.
Since the beginning of 2011, Fitch has taken negative rating actions on 12 issuers due in part to share repurchases. This compares with just three negative actions taken in 2010. All but one of the 12 issuers was rated investment grade, and most of the affected companies were in the ‘A’ and ‘BBB’ categories.
The growing levels of share repurchases were financed not only with free-cash-flow, but also with a larger dose of borrowings.
The increase in share repurchase activity reflects a willingness on the part of management teams to move down the credit scale, as well as the favorable market conditions.
Fitch notes that these actions leave companies with less flexibility in the event of another economic downturn, brought on, for example, by a deepening euro zone crisis or an oil price shock.
Fitch expects further aggressive share repurchase activity in 2012 as borrowing rates continue to move lower, even as stock prices have recovered from October 2011 lows. This will likely continue until economic growth accelerates, prompting companies to shift resources toward growth initiatives or M&A activity.
For details, see Buybacks Up, Ratings Down