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Share buy back

Anyone know if it might affect a company's credit rating?

A bit obscure, I realise, but a client of ours is doing a share buy-back (properly with legal support!).  They wondered if it might affect their credit rating, which they have spent some time improving over the last year....

Anyone had any experience of this?

Thanks!

 

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12th Feb 2019 17:27

A matter of degree and extent I imagine but reduced share capital and reserves would increase risk to prospective lenders/suppliers, I suppose. I have no idea how credit ratings are arrived at.

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12th Feb 2019 17:50

One of the aims of the company law provisions is the protection of creditors. Provided the company sticks rigidly to these provisions (e.g. payment out of retained profits) why should it affect the credit rating?

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to chicken farmer
12th Feb 2019 22:12

chicken farmer wrote:

One of the aims of the company law provisions is the protection of creditors. Provided the company sticks rigidly to these provisions (e.g. payment out of retained profits) why should it affect the credit rating?

https://www.thetimes.co.uk/article/buybacks-at-diageo-prompt-credit-rati...

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to chicken farmer
13th Feb 2019 08:54

Because the cash used to buy back the shares would no longer be available to pay creditors?

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to johngroganjga
13th Feb 2019 10:14

Purchases have to be either (a) out of retained profits or the proceeds of a share issue, or (b) wholly or partly out of capital.
In the case of (a) the retained profits will have been calculated after deducting the amounts due to creditors, so their interests will be protected.
In the case of (b) the directors have to file a statutory declaration of solvency which confirms that the company will be able to pay its debts as they fall due immediately after the buy-back and for the following 12 months.
So I still don't see why the buy-back should affect the creditors

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to chicken farmer
13th Feb 2019 11:22

chicken farmer wrote:
Purchases have to be either (a) out of retained profits or the proceeds of a share issue, or (b) wholly or partly out of capital

Either way, though, cash reserves will be depleted and/or debt will increase.

Which do you think would have the higher credit rating:

Company A with net assets of £5m, capital £1m and reserves £4m

Company B with net assets of £1m, capital £1m and reserves £0

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By Waves
to Wilson Philips
13th Feb 2019 11:33

Wilson Philips wrote:

chicken farmer wrote: Purchases have to be either (a) out of retained profits or the proceeds of a share issue, or (b) wholly or partly out of capital
Either way, though, cash reserves will be depleted and/or debt will increase.

Which do you think would have the higher credit rating:

Company A with net assets of £5m, capital £1m and reserves £4m

Company B with net assets of £1m, capital £1m and reserves £0

That example isn’t, to my mind, correct.

When a buyback occurs, a capital redemption reserve is created equal to the shares purchased. Net assets do not change.

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to Waves
13th Feb 2019 11:48

If the company pays out £4m in cash then why do you think net assets would not change?

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13th Feb 2019 12:04

Thank you so much for this input, very helpful and I am giving it some thought in respect specifically of my clients circumstances.
I really appreciate your time and comments.

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