Coincidence?

We have discussed several times how corporations are using debt to facilitate share repurchases and how higher interest rates might not only bring an end to the share buyback trend, but could, eventually, result in corporations selling shares in the future (to pay for maturing debt if interest rates are too high to make debt refinancing economically feasible). Some readers have expressed doubt as to the relationship between debt issuance and share repurchases. Thus, when MetLife announced it was repurchasing $1 billion worth of common shares, we decided to look at MET’s 2014 debt issuance. The last U.S. dollar-denominated bond issued by MetLife was the 3.60% due 4/10/24. The bonds are dated 4/10/14. The size of the bond issue was $1 billion. What was the stated use of the proceeds? According to MetLife, the proceeds are to be used for “General Corporate Purpose.” Maybe the fact that MetLife issued $1billion of debt and two months later it buys back $1 billion of common shares was a coincidence. Then again… Using debt to repurchase shares is not necessarily a bad thing. When interest rates are low, debt-fueled common stock buybacks might make sense for corporations and can be positive events for stockholders. However, just as corporations might use debt sale proceeds to repurchase shares when rates are low, they can re-issue common shares to pay off maturing debt when borrowing costs are higher. Investors who own stocks which have benefitted from share repurchases should be mindful of this when interest rates begin to climb.