Capital Markets

Bleached Bonds

Clorox's buyback may brighten shareholders, but it also may make bondholders turn white.
Stephen TaubSeptember 7, 2007

Moody’s Investors Service downgraded The Clorox Co. Friday after the company took on debt to fund a stock buyback.

Moody’s said its downgrade of the company’s senior unsecured debt from A3 to Baa1 “reflects the recent deterioration in Clorox’s credit metrics” after the company borrowed funds to help repurchase $750 million of its stock under an accelerated share-repurchase program.

As has reported, Clorox said on August 13 that it intended to use a combination of commercial paper and existing cash to initially fund its accelerated share-repurchase agreement with Citibank and JP Morgan Chase Bank. The company said that excluding any acquisitions, it anticipates using its fiscal 2008 cash flow to reduce debt used to finance share repurchases. Under Clorox’s agreement with the banks, the final settlement of the repurchase program is scheduled for no later than January 24, 2008.

“The company’s recent adoption of a more aggressive financial policy, including increased dividends and materially larger share repurchases will likely result in weaker debt-protection measures in the years ahead,” warned Moody’s. The credit-rating agency also expressed concern about the marketing costs of Clorox’s proliferation of new products, intense competition for market share worldwide, the company’s limited sales diversity among regions and customers, volatility in Clorox’s Latin American segment, and exposure to volatile raw material and energy prices.

However, Moody’s did say that its outlook for Clorox debt is stable. “The stable outlook assumes that Clorox will manage its financial policy so as to maintain a financial profile appropriate for its Baa1 rating,” it added. However, Moody’s added that its outlook could change if the company pursued any major debt-financed acquisitions or additional share repurchases.

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