American credit market outlook

With corporate America having cleaned up their balance sheets and boosted cash holdings in the aftermath of the late-1990s binge, Morgan Stanley analysts say the halcyon days of credit quality may be coming to an end.
As highlighted by Microsoft's move this week to return $32 billion to stock investors with a one-time divided and a total of $75 billion over the next four years, companies are doing what they can to please shareholders these days.
Often that means burning cash that could otherwise be used to reduce debt to hand money back to stock investors, particularly given the special tax treatment dividends now enjoy.
"In our view, the baton is firmly being passed to equity holders, which necessarily commences the beginning of the end for the golden age of being long credit," said Morgan Stanley strategists Gregory Peters and Rizwan Hussain in a weekly note to clients."The current unlocking of shareholder value will sow the seeds of future balance sheet ruin," they said.
Companies which have undertaken shareholder-friendly actions lately include Clear Channel Communications, Liberty Media, Citizens Communications and British retailer Marks & Spencer.
The Morgan Stanley strategists said the media and utility sectors were most susceptible to such cash-burning, investor-pleasing actions.
By looking at companies with a high level of cash relative to debt and poorly performing shares, they found several potential candidates. Hewlett-Packard, drugmakers Pfizer and Wyeth, SBC Communications, BellSouth, Time Warner, AT&T and Comcast, to name a handful. If those companies that have paid out special dividends receive a favourable reaction in the stock price, "this will serve as the green light for the rest of corporate America to hop on board the equity culture train," the Morgan Stanley note said, adding that chief executives are not compensated in a company's bonds.
Citizen's stock shot up more than 12 percent in the initial reaction to the dividend announcement made almost two weeks ago and remains up 9 percent.
The strategists did say they were pleased that the major credit ratings agencies quickly downgraded Citizens to junk status when it issued its special dividend, saying it was a "stern message to companies that the credit side has zero tolerance for impairing the balance sheet.