Buyouts Benefiting From High Yields Turned Low: Chart of the DayDavid Wilson
Leveraged buyouts may be as compelling as ever because borrowing costs are so low for less-creditworthy companies, according to Stephen Antczak, Citigroup Inc.’s head of U.S. credit strategy.
The CHART OF THE DAY tracks a Citigroup index of the average bond yield for companies with B ratings, which Antczak cited in a report as a typical post-buyout level. The gauge is compiled monthly.
January’s average yield of 5.86 percent was the lowest since at least 1984, according to the index. Data compiled by Bloomberg shows the yields on benchmark maturities of B rated debt are near lows set last month.
Financing costs are part of a “package effect” working in favor of buyouts, which reward shareholders at the expense of bondholders, Antczak wrote in a Feb. 22 report.
Lower interest expense increases the odds that a company will survive and keep paying dividends after a buyout, the New York-based strategist wrote. The report cited Citigroup figures that put the risk of default within a year for B rated companies at 1.6 percent, below a 4.4 percent average since 2000.
“One doesn’t have to pay all that much for these advantages,” Antczak wrote, judging by price-earnings ratios. Shares of 90 non-financial U.S. companies with investment-grade ratings traded at 12.8 times profit as a group as of Sept. 30, according to the report. The multiple was below an average of
16.4 times since 2000.