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Banking

Watch out, financial engineers are about

Leveraged buyouts and auto company problems are taxing the minds of bond investors, but there's a more insidious form of event risk they should be wary of. Company executives, under pressure from boards and active investors including hedge funds, are starting to engage in financial engineering to try to boost their stock price. Bondholders are set to lose out. Antony Currie reports.

WHAT IS THE biggest event risk that buy-side credit analysts will be grappling with in the next few months? The answer, given the turmoil of recent weeks, might seem obvious. In fact, though, it's not the fear of credits in a portfolio being subject to a leveraged buyout, whether real or rumoured. Nor is it how to deal with the fallout from the downgrades of the unsecured debt of Ford Motor Company and General Motors to junk status.

Both remain near the top of the list, but the event risk that is increasingly a concern to the credit buy side is the growing power of shareholders, and the increasing willingness of corporate chieftains to appease them. It could be as simple as a share buyback, but could go all the way to splitting up a company.

The fear that raises is simple, reckons Mark Howard, global head of credit research for Barclays Capital in New York. "It puts the interests of debt holders squarely at odds with those of equity holders," he says. "Such events can turn out to be benign to bondholders, but some managements will exploit the lack of contractual teeth in high-grade bond deals and layer on more debt."

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