Macy’s Inc, Gannett Co and New York Times Co’s attempts to prop up their stocks with debt- funded buybacks have left them saddled with higher borrowing costs as they work to pay off loans.
Standard & Poor’s 500 companies have spent $1.73 trillion on buybacks through September since the fourth quarter of 2004, according to the ratings company. With the US in a recession, the companies face the threat of additional credit-rating downgrades after being punished for the earlier borrowing. “You had debt-financed share buybacks at a time when the market was good, their businesses were good,” said Edward Henderson, a senior analyst at Moody’s Investors Service in New York. “Then it turned real quickly.”
New York Times, with $1.1 billion in total debt, spent more than $1.8 billion buying shares from 2000 to 2004, enough to have retired all of its borrowings, said Mike Simonton, an analyst at Fitch Ratings in Chicago. Gannett could have paid down most of its long-term debt with the $3.44 billion spent on buybacks since 2004. Macy’s recently renegotiated its bank loans to erase doubts that it could repay loans due next year. S&P cut the New York Times’ debt rating three levels to a BB- junk grade in October and has a negative outlook on the company, signaling further reductions are possible. A $400 million credit line is due in May.
To raise cash, the New York-based newspaper publisher slashed its dividend by almost three-fourths and is pursuing a $225 million sale-leaseback of its headquarters. It’s also trying to sell its 17.5 per cent stake in the company that owns the Boston Red Sox baseball team, according to a person familiar with the discussions.
The company paid as much as $44.83 a share on average for its stock in 2003, according to filings. That is more than six times the current price. New York Times has reduced buybacks to about $110.5 million in total in the last four years to offset dilution from employee stock options, spokeswoman Catherine Mathis said in an interview.
Gannett, the largest US newspaper publisher, had to draw on unsecured revolving credit in October to repay commercial paper. The McLean, Virginia-based publisher’s debt rating has slid six levels since 2000 to BBB-, one step above junk.
The company, which also operates TV stations, offered to purchase $750 million of notes maturing in May for 95 cents on the dollar. Holders of 13.5 per cent of the notes accepted the offer. Spokeswoman Tara Connell didn’t return a phone call seeking comment.
Before lending froze, companies tapped relatively cheap credit to buy back stock and boost sagging share prices and earnings. Investors cheered the moves, at least temporarily.
Record subprime-mortgage defaults dried up lending, the housing slump deepened and investment banks collapsed. Companies that once could handle their debts are struggling as shrinking consumer spending and advertising sales drain their cash.
“The confidence that underwrote companies’ ability to raise debt is gone,” said Harlan Platt, a finance professor at Northeastern University in Boston.
Home Depot Inc, the world’s largest home-improvement retailer, announced plans in June 2007 to repurchase as much as $22.5 billion of its shares, financed by the sale of its HD Supply unit and $12 billion of bonds.
Moody’s cut the Atlanta-based company’s rating four levels to Baa1, the third-lowest investment grade, and S&P lowered it three steps to BBB+. The year before, the retailer had raised $7.6 billion in new borrowing, in part for $8.1 billion in buybacks and dividends.
“Anytime somebody does a debt-financed share repurchase, it uses up room under ratings,” Henderson said.
Home Depot ultimately put the new bond issue on hold and cut the repurchase in half, yet its debt ratings weren’t restored because the buyback authorization remains in place. Spokeswoman Paula Drake declined to comment.
Publishers’ shares have dropped as investors focused on the loss of readers, advertisers and revenue to the Internet. New York Times has slid 87 per cent since a peak of $52.79 in 2002, and Gannett is down 92 per cent since its high in 2004.
“Companies failed to switch gears quickly enough, underestimating how much the shift of dollars to the Web would accelerate,” Ken Doctor, a media analyst at the consulting firm Outsell Inc in Burlingame, California, said in an e-mail.
With credit tight, buybacks slowed last quarter to $89.7 billion, down from the record $172 billion spent a year earlier, S&P data show. The S&P 500 Index has tumbled 44 per cent since peaking at 1565.15 on October 9, 2007.
Macy’s, the second-largest US department-store company, announced a more flexible bank-credit agreement on December 17 to quell doubts about its ability to meet next year’s debt maturities. The retailer’s shares have declined 77 per cent in two years.
The company repurchased $3.32 billion of stock last year, contributing to a $1.24 billion increase in long-term debt and 2007 interest costs that rose by more than a third to $543 million. S&P rates Macy’s debt BBB-, the lowest investment grade, and is considering a cut.
Macy’s hasn’t purchased any shares this year and doesn’t plan to in 2009, according to filings.
“Early in 2008 we said that we would stop our share repurchase program so that we could conserve cash,” said spokesman Jim Sluzewski.
With holiday sales projected to be the worst in 40 years, retailers may close 73,000 stores in the first half of 2009, according to the International Council of Shopping Centers in New York. At least a dozen US retailers have entered bankruptcy this year, according to data compiled by Bloomberg.
“Bottom line, I think a lot of companies pushed the envelope too far,” said Nicholas Riccio, managing director for corporate ratings at S&P in New York. “It’s one thing to leverage up a little. It’s another thing to leverage up too far.”
