Bloomberg Anywhere Remote Login Bloomberg Terminal Demo Request


Connecting decision makers to a dynamic network of information, people and ideas, Bloomberg quickly and accurately delivers business and financial information, news and insight around the world.


Financial Products

Enterprise Products


Customer Support

  • Americas

    +1 212 318 2000

  • Europe, Middle East, & Africa

    +44 20 7330 7500

  • Asia Pacific

    +65 6212 1000


Industry Products

Media Services

Follow Us

Bloomberg Customers

Businessweek Archives

When Heavy Debt Can Lift A Stock

Personal Business: SMART MONEY


Corporate America's love of leverage has cooled. Nevertheless, some investment pros are encouraging investors to snap up shares of companies mired in debt.

These experts believe that heavily leveraged companies have more to gain from declining interest rates and a rebounding economy than companies with little or no debt. By taking the opportunity to refinance or pay down expensive debt, leveraged businesses can increase cash flow and lift both earnings and stock values, says Anand Iyer, vice-president for research at Salomon Brothers.

HAIL CAESAR. A recent Salomon study reveals that a 1% rise in cash flow causes the equity value of a company with a 75% debt-to-capital ratio to go up 4%. The greater the debt, the bigger the impact on the equity. Conversely, a company with no debt posts an increase of just 1% in equity value on a 1% cash-flow rise. Some investors have already made a bundle on leverage stocks. In the first eight months of 1991, the shares of 28 heavily indebted companies, including RJR Nabisco and Caesar's World, produced an average return of 69.2%, compared with a 22% gain for Standard & Poor's 500-stock index.

RJR shares, for example, have nearly doubled, to 10 3/4, since they were first issued to the public on Feb. 1. Analysts say a reduction in the company's debt-to-capital balance to 70% from 88%, along with lower interest costs on the remaining $16.5 billion in debt, have helped push up the stock.

Caesar's World, carrying $419 million in debt, has seen its stock price jump 90% this year, to more than $31 a share. The hotel-and-casino operator has reaped the benefits of a gambling resurgence in Nevada and Atlantic City. But it is also expected to gain from refinancings. Mark Brostowski, high-yield-securities analyst at Salomon, says Caesar's could save $6.5 million to $9 million annually in interest--or 18~ to 24~ a share. That could translate into a 10% increase in earnings and a corresponding climb in the stock.

The Salomon analysts are watching other leveraged companies, including Kroger, Safeway, TW Holdings, Viacom, and Duracell. They favor some bonds and preferred and convertible stocks as well as common shares. For example, they estimate that the common and convertible preferred shares of Chiquita Brands International, whose debt exceeds $1 billion, will each produce a return of 25% in a year.

If a strong recovery fails to materialize, or interest rates start edging up, all bets are off. "The highly leveraged stocks are the ones that will perform the worst," says Jack Sullivan, a principal at Van Kasper & Co., a San Francisco investment firm. Such a scenario would forestall efforts to improve operations and to clear high-cost debt off the balance sheets.SOME ENTICING


Debt-to- Stock

capital price*

CAESARS WORLD 53. 2% 31 3/8

CHIQUITA BRANDS 53. 2 40 3/4

RJR NABISCO 72. 9 10 3/4

SAFEWAY 93. 0 18 7/8

TW HOLDINGS 96. 0 3 1/2



blog comments powered by Disqus