November 14, 2007

Share Buybacks Do Not Always Result in Ratings Downgrades

Recently, we have been seeing a number of questions in our Q&A Forum regarding issuer and affiliate share repurchase programs. When share prices are down and issuers have available excess cash or credit, buybacks can be a very effective tool to consider. One concern with share buybacks, however, has been that they are often perceived as unfriendly to an issuer’s bondholders because they use up cash or credit that the bondholders would rather see available for debt service.

Moody’s Investors Service recently conducted a study of 100 buyback programs announced over the last 19 months and determined that – in their sample – the announcement of a share repurchase program prompted no rating action 56 percent of the time. However, there was a change in rating outlook or a downgrade of the issuer’s credit rating in 44 percent of the situations that Moody’s sampled.

Moody’s notes that some of the factors which may potentially head off downgrades or changes in outlook following announcement of a repurchase program include:

– the funding for the share repurchases comes from excess cash on the balance sheet, predictable future operating cash flow, or asset sales (so long as the asset sales have no impact on collateral values or future earnings), rather than from incremental debt;

– the buyback program is too small to be material to credit quality;

– the buyback program leaves the issuer still adequately positioned at the current rating; or

– the repurchases will only place temporary pressure on credit metrics (for example for only one or two years).

Beyond the ratings concerns, there are of course a number of legal issues to consider when designing and implementing a share buyback program. For example, structuring the program under Exchange Act Rule 10b-18 is important in order to have a safe harbor from manipulation claims, and the issuer must be cognizant of potential anti-fraud liability for trading on material nonpublic information when it is buying back in its own securities. Issuers also need to consider any Williams Act or Regulation M implications of a buyback program, and disclosure of repurchases is now required in periodic reports under Item 703 of Regulation S-K. For more information, check out our “Stock Repurchases” Practice Area.

Are You DRS-Eligible?

As noted in this recent memo from Skadden Arps Slate, Meagher & Flom LLP, by January 1, 2008 all issuers whose securities are listed on the NYSE, Nasdaq and Amex must ensure that their listed securities are eligible for participation in the Direct Registration System – also known as DRS. Given the amount of time necessary to complete the process of becoming DRS-eligible, any issuers who are not already DRS-eligible have less than a month to take all of the necessary actions.

In this podcast, Allison Land of Skadden describes the latest issues with DRS, including:

– When is the DRS-eligible deadline and what happens if a company misses the deadline?

– What do companies need to do to become DRS-eligible?

– What are the common pitfalls that you are seeing for companies trying to become DRS-eligible?

November-December Issue: Deal Lawyers Print Newsletter

The November-December issue of Deal Lawyers has just been dropped in the mail – and includes articles on:

– The Demise of the Broadly Written MAC: Will the Plain Language Standard Replace the Reasonable Acquiror Standard?

– Full “Walk-Away” Values at Termination and Change in Control

– How to Calculate the Full Walk-Away Value

– Merging Qualified Plans: Five Steps to Eliminate Post-Closing Headaches

– Due Diligence Review of Internal Controls: Focusing Beyond the Numbers

As all subscriptions are on a calendar year basis, it is time for you to renew your subscription. If you are missing these critical issues, try a 2008 no-risk trial to get a non-blurred version of this issue for free.

– Dave Lynn