Stock Buyback Shocker: Companies Using Secured Bank Loans To Repurchase Stock

Tyler Durden's picture

It took the mainstream media a few months to catch up to the theme first revealed here that in addition to the fading QE (even if supplanted by NIRP in Europe and Turbo QE in Japan), one of the primary driving forces of the market's outperformance in 2014 was a relentless buyback bid as corporations, lacking better uses for their cash, bought a record amount of their own shares in Q1 (and as will soon be proven) in Q2 attempting to increase the EPS by lowering the S.

It was only logical that it would take the MSM a while to follow up with the obvious connection: one which is so simple we described it back in 2012 when we showed "Where The Levered Corporate "Cash On The Sidelines" Is Truly Going" - namely, an unprecedented scramble to lever up and use the proceeds to buy back stocks, a decision which is great for existing shareholders and horrible for the economy (as it means much less spending on capital investment) for employees (as it means less cash available for wages and thus, for the all important wage inflation) and for the long-term viability of the buying back company (as it levers up the corporate balance sheet without a matching increase in revenues or cash flows, in fact, the opposite).

Which brings us to today, and specifically, an FT article titled "Bankers warn over rising US business lending" in which we read that "US lending to businesses is reaching record levels but banks are privately warning that the activity should not be seen as evidence of an economic recovery."

And the stunner: "Much of the corporate lending is going to fund payouts to shareholders, finance acquisitions and fuel the domestic energy boom, bankers say, rather than to support companies’ organic growth."

What the FT is referring to is not only the record net unsecured debt plaguing corporate balance sheets, because as both we and Deutsche Bank showed, net debt is at the highest level ever while corporate cash has never been lower...

...but also the recent surge in bank loans and leases which finally, after years of virtually flatlining, have start increasing as shown in the chart below.


The highlighted increase in the Y/Y rate of issuance of loans and leases by US commercial banks is critical as it has been widely trumpeted as the main reason why the economy is once again starting to pick up, and for the first time since the launch of QE, there appears to be a substantial increase in demand for commercial and industrial loans by US corporations: easily the biggest missing link to confirm the so-called US "recovery."

Well, not so fast. Because if what the FT says below is true, one can promptly scrap the entire premise that "loans are increasing therefore the economy is on the mend." Here is what the FT had to say:

Total outstanding commercial and industrial (C & I) lending, which runs the gamut of loans to sectors from energy to healthcare and excludes consumer or real estate loans, rose to a record $1.7tn in May from a post-crisis trough of $1.2tn nearly four years ago, according to data from the Federal Reserve Bank of St Louis.


For the top 25 US commercial banks by assets, C & I lending grew by 10.5 per cent in the quarter to June 25 from the previous quarter, according to annualised weekly data from the Federal Reserve.


This type of lending is an important source of business for the largest US banks, representing about a fifth of all loans made by the likes of Bank of America, JPMorgan Chase and Wells Fargo, according to Citigroup research. While low interest rates have made business lending less lucrative, the relationships it forges open doors for the banks to sell other services such as treasury management, hedging and leasing.


A second corporate banking executive at a large regional lender said: “The larger part of the usage in the market right now are loan refinancings where companies are paying dividends back out.”

And the absolute shocker of a punchline:

He added: "They’re requesting increased loans or usage under a lien in order to pay a dividend or equity holders of a company. Traditionally banks have been very cautious of that."

The soundbite conclusion from the FT is self-explanatory:

Charles Peabody, a bank analyst at Portales Partners in New York, has warned that while it is hard to extrapolate what is driving commercial and industrial lending, if it is to fund acquisitions or share buybacks it may not indicate a strengthening economy. “It is loan growth, just not sustainable,” he said.

Actually, it is far, far worse.

What the FT is effectively saying is that unlike before when companies would issue unsecured debt (i.e. General Unsecured Investment Grade bonds) which would be used to find buybacks and dividends - something which is perfectly in the company's right to do as long as it has revealed the use of proceeds to yield chasing bond investors, what companies are doing now is taking on secured debt and using the proceeds to fund buyback their stock or fund dividends!

It is here that the hair of anyone who has ever underwritten any debt, secured or unsecured, should stand on end. Because this revelation shows that unlike the last bubble, when levered buybacks once again went through the roof, at least they were unsecured and the bank did not have a lien on any assets should the company ultimately file bankruptcy as a result of a debt issuance spree.

This time, however, in order for shareholders to cash out, existing bondholders will be primed by the bank when the rate cycle finally turns and all the companies that were scrambling to reward investors now and up going tits up. It also means that banks effectively become lienholders in companies without having any actual collateral backing their loans, because while tracking down the cash outflow to shareholders may be a fun way to spend a decade in court demanding a fraudulent conveyance case, it means virtually no recoveries when all is said and done.

In simple terms: instead of indicating a recovery, any recovery, the only thing the recent surge in loans and leases indicates is that companies are increasingly more desperate to cash out their shareholders, and are completely oblivious of what form of debt they use to fund such shareholders friendly activities as stock buybacks and dividends.  It certainly means that instead of using the liened cash to invest in growth, or even maintenance, CapEx, so critical for the non-recovering economy, the only thing that is happening is that banks are effectively funding corporate shareholders with secured debt, in the process collateral-stripping the intermediary companies which with every such incremental deal have less and less recourse to unencumbered assets.

Welcome to the new normal capital structure, where everything is upside down and nothing makes sense.

Oh, and to all those pointing to the weekly increase in the H.8 statement and screaming "look at the recovery", our apologies: you are, as usual, wrong.

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redpill's picture

Why would you re-purchase your own stock when the market is at record highs?  Idiots.

Groundhog Day's picture

but what about all that cash on the sidelines

wallstreetaposteriori's picture

Why would you purchase at record highs....?  Because exectuive bonuses are tied to stock prices... Can you say principal agent hazards?

NotApplicable's picture

I'm still trying to wrap my head around annualizing weekly data in order to measure quarter over quarter change. I guess reality isn't as reliable of an indicator?

hedgeless_horseman's picture



Stock Buyback Shocker: Companies Using Secured Bank Loans To Repurchase Stock

With money so cheap, this is smart.  Treat equity like gold. 

Pladizow's picture

What? You mean US CEO's are doing what's best for their salary, bonus and stock options and not what's best for the company 10 years after they are gone???

hedgeless_horseman's picture



If/when inflation really gets going these management teams are going to look like geniuses.

CrazyCooter's picture

With the caveat we are heading into the maw of the most massive deflationary vortex in history ... which is what the Fed has been fighting (and losing) ... if they sacrifice their fiat on the altar of can kicking, they risk losing it all.

Something has to break soon, one way or the other, but I have been saying that for years ... so pay no attention to me!



Spitzer's picture

"You can't taper a ponzi scheme" - Max Keiser

RafterManFMJ's picture

Q: What's the difference in the above picture?


A: The Negro on the right is honest about his intentions, and we know where he was born.

SoberOne's picture

Gold, a great store for your labor since 0.

Oracle 911's picture

Just 2 silly questions:

From what source they get the payments for these loans?

And what will happen if the source is gone?

hedgeless_horseman's picture



From what source they get the payments for these loans?

Revenue.  Payments to the banks will be made ahead-of / instead-of payments to employees and shareholders.

....what will happen if the source is gone?

Haven't you been paying attention?

Bailouts, of course! 

Privatize gains, socialize losses.

Kirk2NCC1701's picture

As I've commented a year ago, this is exactly how executives from all those Emerging Markets in Eastern Europe took over their companies that were formerly national assets.

Highly leveraged MBOs, with bankster funding.  Really good for execs, banksters, GS, the Fed, Neocons -- the 0.01%.  Really bad for everyone else.  The MO is the same for all Countries:  Create humongous national debt via socialist or militarist funding, then privatize all national assets, so that the 0.01% get to control and rule over all. 

NoDebt's picture

But the companies taking out these loans are already private companies.

I can't believe nobody has gotten to the nub of why this is happening:  Execs are paid MASSIVELY higher portions of their compensation in company stock and stock options than ever before.  Their ONLY goal is raising the share price.  Even if it's alreay 800X book, they'll push it to 1000X book.

NOTHING has changed.  This is AGAIN a very few at the very top getting theirs, while they put even their own companies at SEVERE risk in the longer term.  They don't give a DAMN if the company goes under in a few years.  They are in the PERFECT position to see it coming in advance, cash out and head for greener pastures.  Leaving the rest of us (taxpayers, anyone who has to live with the effects of massive bailout money printing) to clean up the mess afterwards and deal with the consequences.  

El Oregonian's picture

Whimpy: "I'll gladly pay you next Tuesday for a fiat loan today."

THX 1178's picture

If the companies buy back their own stock with debt, and then the currency is reset on july 20 2014 (like lagarde forewarned us) or somethime soon, the debt after the revaulation will seem microscopic in comparison and the stocks will have gone up byb a tremendous and amazing amount. And that is assuming the currency doesnt go to 0 which it might. If a debt jubilee is coming, might as well load up on debt.

tarsubil's picture

So what happens if this bubble bursts and plundering execs are blamed? Would people go after them? Haha, just like the banks in the last one, I'm sure. The plunder economy!

rainingFrogs's picture

earnings per share, baby
earnings per share
doesn't matter how you get there
its all just earnings per share

- the latest (s)hit single, "Baby, I'm Rich, Man (and you're not)", by Jamie and the Dimon Thieves

Whootie_who's picture

Pump the price, redeam their options ... dump the options at the top ( buy some puts while up there) ... repeat... retire... move to the next "underperforming" company

Grande Tetons's picture

Cash on the sidelines equals a Brazilian sub going on to the field being down 5 goals. 

You can run like hell and maybe put one past...but you are still going to lose. 

ParkAveFlasher's picture

They blew their load running around like madmen chasing Colombia (which was a great game), or they are extremely hung over from partying with Colombia, or they are taking a dive. 

Grande Tetons's picture

Greg Louganis would have been proud of the effort...and the short shorts. 

AccreditedEYE's picture

Start shorting the crap out of VIX / Vol again. They will never let this bitch drop.. Shorting Vol fastest way to profit.

Cognitive Dissonance's picture

Because nothing else you can do during a declining economy can boost or maintain the sock price like share repurchases.

Winston Churchill's picture

They are eating their own extremities.

Hell of a way to commit suicide.

Jumbotron's picture

"They are eating their own extremities.

Hell of a way to commit suicide."


You might want to read this.

I Write Code's picture

Well, you end up buying less, of course.

And if a company is doing poorly and the stock price is down, that's an ever worse time to be buying your own stock, unless you know of some material change for the better coming up.

Cognitive Dissonance's picture

Besides cheap money makes for stupid buying decisions. Just ask average Joe if he spends more when putting it on a credit card rather than using cash out of his pocket.

ParkAveFlasher's picture

Credit card debt is not easy money, unless you define "easy money" as 20% interest payable versus a scarred credit rating.  I would say that government largesse is the symptom of the easy money disease.

Groundhog Day's picture


Why would you re-purchase your own stock when the market is at record highs?

one word:


yogibear's picture

Yep bonuses and options. Cash them in as the company is buying and boosting the price.

The board and CEO care about themselves, not the company.

hedgeless_horseman's picture



Why would you re-purchase your own stock when the market is at record highs?


Dr. Engali's picture

Stock options comes to mind as a good reason.

seek's picture

You know, I've been pondering this and other unusual behavior the last few days, and I stumbled on an idea that made sense in a fucked up way, but scares me.

Thought experiment time. This can take several forms, but try this one:

What would you do if you had a credit card, say a 50K limit card, with no balance, and you were just fired from your job -- and then a friend that works at that card company tells you their accounting system is utterly fucked, and he knows for a fact that not only will the credit card company go under because of this, but also that they will not be able to have any kind of reliable, valid means of connecting charges to specific cards.

If you're immoral and/or don't give a shit, you're going to run that card until it stops working, that's what you're going to do.

Another take: we hear the words "debt jubilee" tossed about. What if you knew for certain there was actually going to be one in the next five years? That any loan, secured or not, would be forgiven, and the title to whatever you bought would remain yours?

Same deal, if you don't have any moral qualms about it, you take out every loan you can get, and buy shit.

I don't for a moment think either of these will happen for "normal" everyday Joes making house and car payments. But if you're a 0.01%er, or a large corporation, these buybacks are increasing your titled asset holdings, at the price of carrying loans at near 0% rates. Imagine you were an insider and knew the Fed actually was going to collapse, or that there would be some new financial crisis that would result in a new dollar, move to SDRs or some other currency, or basically anything that would make destroy-the-banking-system sized loans null and void, forgiven or forgotten. If you were in that situation, you'd be doing exactly what the ultra-wealthy and large multinationals are doing today.

TVP's picture

That may all be good and true, but no collapse or currency swap will be necessary.  It could work out that way, but who knows.


All of the same logic you just used applies equally to a scenario of currency devaluation. 


I think they're just waiting until people begin rioting and looting for their food, to do anything one way or another.  

BandGap's picture

About five years ago I read exactly that same thing. When it gets close to inflation time -----> hyperinflation time, salaries will be boosted to match the inflation rate. Maybe they fall a bit behind, but look at the Weimar. You literally got paid in wheel barrows of cash.  Now, if you have a car loan, a mortgage or a credit card with a balance THOSE cannot be inflated, they are contractual.

The suggestion at that time was to borrow as much as possible because you'd be able to pay off your debt very quickly in the "new" dollar system. 

Just a thought.


LawsofPhysics's picture

World war III will happen first.  Countries have gone to war over less, but they sure as hell will go to war when their productive capacity or real assets and/or control over energy resources is threatened.  hedge accordingly.

BandGap's picture

The world is making Bible prophesies come true. Caliphate between the Tigris and Euphrates.  The bear and the dragon uniting. Dogs sleeping with cats.

I'm sitting this one out.


Four chan's picture

im betting on gold silver and oil winning the religious retardo battle.

TVP's picture

Might have something to do with the fact that corporate profits are also at record highs.  


I'm not going to provide a link, anyone who cares can look it up, but a line graph of cratering labor force participation creates a perfect inverse of sky-rocketing corporate profits.  Less workers = less wages and benefits to pay out = more profits.


What to do with those profits, since there's no one to pay other than executive bonuses, already well into the millions?  




BadKiTTy's picture

I assume because corporate insiders are the stock holders and want to cash out at the top.  A big part of their pay is in shares and options. 


Nick Jihad's picture

The jokes on them, for exchanging valuable shares for worthless fiat! :-)

Jumbotron's picture

Well of COURSE they use secured loans to buy back the stock nobody wants to buy at the price they are selling it at.

Circle Jerk Ponzi = Modern Day Finances

NYPoke's picture

"Why would you re-purchase your own stock when the market is at record highs?  Idiots."

Because the people at the top, making the decisions, own stock.  They want to boost their own holdings.  Near the end, they can legally sell their holding & leave the company screwed over.


Or, they are just plain stupid.  Morelikely, they are greedy.

Jumbotron's picture

"Why would you re-purchase your own stock when the market is at record highs?  Idiots."

1: Bonuses

2: Today's All Time High is the Low Price first thing the next morning.  Where in NIRPland are you going to get the potential for ANY kind of yield. 


Buy the High in the in the again in the morning.

EVERYBODY is a day trader now in NIRPland

CrashisOptimistic's picture

"And the stunner: "Much of the corporate lending is going to fund payouts to shareholders, finance acquisitions and fuel the domestic energy boom, bankers say, rather than to support companies’ organic growth."


The buried part of that is the part that matters.

Shale is all funded by borrowed money.  Why is that?  It's been 3 or 4 years now this "boom" has been going on.  Why isn't cash funding drilling?