Debt Contagion
US retailer Home Depot (persistently rumored to be a potential private equity target) has announced plans to borrow some USD 12 billion to finance a USD 22.5 billion share buyback, one of the largest buybacks ever. The move, which brings with it a lowering of the company's credit rating, highlights the growing penchant for corporations to take on debt in the service of shareholders, rather than investment.
A Citigroup analyst, speaking to the Financial Times, stated that companies with limited debt on their balance sheets are "hurting their returns by being so under-levered. Shareholders, particularly in the large-cap world, are getting more frustrated." In the same July 2 article, Home Depot's chief financial officer is quoted as telling analysts that "our financing strategy is evolving to one that facilitates capital distribution."
The other side of the corporations' transition to "facilitating capital distribution" is the declining rate of real accumulation, or investment in the capital stock. According to Goldman Sachs, an estimated 36% of global spending by non-financial corporations this year will go to share buybacks, with 33% earmarked for capital expenditures - the source of employment and productivity growth. According to a recent Thomson Financial forecast, capital expenditure in Europe as a percentage of pre-tax profits will fall from last year's 64% to 55% in 2007. Debt-financed share buybacks and declining capital expenditures have been identified by the IUF as key aspects of the financialization process, which is undermining the traditional basis of collective bargaining by dissolving the link between investment, productivity, profits and wages.