Moody’s criticizes buyback financing

Reading time: 2 – 2 minutes

According to the Wall Street Journal of July 11, 2006, Dan Curry, a managing director of Moody’s who oversees corporate finance for the Americas, said,

Executive fool on the buyback precipice

“We think issuing debt to repurchase stock or pay dividends is not a good idea — that doesn’t strike us as conservative financial policy.”

This is highly relevant to interpreting recent flows in the bond and equities market, as indicated in the article, “Record Stock Buybacks Financed by Borrowing: Q1 2006“.

My first reaction to Mr. Curry’s statement was:

“Well, duh!”

It seems obvious to me that using bonds to finance buybacks is worse than just “not a good idea”.

Think about it.

Investors are asked to loan money to a company so that it can transfer these funds to shareholders who will have no liability or interest in ever paying them back!

The money is not used to fortify the company and its bond repayment capacity, but rather the opposite.

An investment banker who goes along with such a ridiculous scheme demonstrates not only ignorance of conservative finance, but extremely shaky moral grounds for decisions.

The flow of funds accounts for Q1 2006 indicate that this improper use of bond financing is now running in the billions — not millions of dollars.

This shows that there is something seriously wrong with investment banking in the US.

It appears that Jeff Skilling, ex Enron CEO, was right when he said, after being convicted, “That’s the way the system works.”

The ethical problems of US investment banks were certainly not resolved with the Enron trials.