Stocks buybacks

A share buyback can be an advantage for bondholders, if a low stock price is lifted, thus reducing the danger of a takeover and a change of management. A stock buyback lowers future dividend payments. This may be advantageous for bondholders if there are, for example, high dividends on preferred stock which are de facto paid independently of the economic situation and thereby have the character of a fixed interest rate. Sometimes a share buyback can turn out to be more pleasant than invest-... 

The effect of share buybacks on bondholder value cannot be answered unequivocally. Although there is a risk of wealth transfer from creditors to shareholders, an increased stock price can for example avoid a takeover of the company. Empirical studies come to contradictory results. 

Fundamentally both classic repo and sell/buybacks are money market instruments that are a means by which one party may lend cash to another party, secured against collateral in the form of stocks and bonds. Both transactions are a contract for one party to sell securities, with a simultaneous agreement to repurchase them at a specified future. They also involve ... 

We illustrate a stock loan where the transaction is stock-driven. Let us assume that a securities house has a requirement to borrow a UK gilt, the 5.75% 2009, for a one-week period. This is the stock from our earlier classic repo and sell/buyback examples. We presume the requirement is to cover a short position in the stock, although there are other reasons why the securities house may wish to borrow the stock. The bond that it is offering as collateral is another gilt, the 6.50% Treasury 2003. The stock lender, who we may assume is an institutional investor such as a pension fund, but may as likely be another securities house or a bank, requires a margin of 5% as well as a fee of 20 basis points. The transaction is summarised in Exhibit 10.12. 

In both classic repo and sell/buyback, any initial margin is given to the supplier of cash in the transaction. This remains true in the case of specific repo. For initial margin the market value of the bond collateral is reduced (or given a haircut ) by the percentage of the initial margin and the nominal value determined from this reduced amount. In a stock loan transaction the lender of stock will ask for margin. 

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