Loan Market Tempts Affiliated Computer

The boost was something the stock has needed since 2002. For almost four years, the share price has been relatively stagnant, trading between $50 and $60. By issuing debt and buying back stock, the company has won stock market plaudits by enhancing the earnings participation of shareholders who stick with it.

Both UBS and Stifel Nicolaus raised their Affiliated ratings on Friday. The "announcement is a significant (positive) surprise and a key element of our upgrade of ACS shares," said William R Loomis of Stifel Nicolaus in a report this morning.

Debt markets were less impressed, with Moody's and Standard & Poor's both cutting their rating on Affiliated's outstanding debt. The agencies cited the massive debt levels due to the share repurchase as the reason. Affiliated is bringing its leverage up almost five times its previous level, raising the debt-to-EBITDA ratio -- the standard metric used by the ratings agencies -- from 1 to almost 5.

In a syndicated loan financing, a lead bank commits money to a company at a preset interest rate that reflects its debt rating and loans to companies with similar debt profiles. The investment bank then sells off pieces of that loan to other interested parties. The pieces then trade in a secondary market, where they act similarly to bonds.

Citigroup wil lead Affiliated's loan and has even offered to upsize the deal to $5 billion if the transaction sells well. Right now, at $3.5 billion, the company has leverage generally in line with its competitors. But a bigger deal could potentially drop the company into junk status, said John More, senior analyst at Moody's Investors Services, who assigned the original rating to the company.

Still, given the current demand in the debt markets, the deal could be executed without a hiccup.

"As the debt market gets more bullish, people are willing to stretch on leverage. Investors are willing to pay more for debt as a percentage of the capital structure," said the investment banker.

A company can't make decisions to change capital structure on a whim; debt markets need to be ripe. They are now.