Limited Brands said it will sell $750 million in 10-year notes. The company said it intends to use the proceeds to repurchase $500 million of stock under a new share repurchase program and for general corporate purposes.
The move seemed to surprise some commentators. But investors applauded the move, bidding up the stock by more than 1 percent when it began trading Tuesday morning.
The transactions, however, were seemingly encouraged by Moody's Investors Service.
As it turns out, just two weeks ago the rating agency had upgraded Limited Brands Probability of Default ratings to Ba1 from Ba2 while its senior unsecured guaranteed notes rating of Ba1 was affirmed.
"The upgrade reflects Limited Brands' very strong operating performance and Moody's belief that its performance will continue to improve," Moody's wrote, citing the company's 11.4 percent revenue increase in the January 29, 2011 fiscal year, buoyed in large part by a very impressive 9 percent increase in comparable store sales. Also, operating income grew by nearly 50 percent.
In addressing the rating upgrade, Moody's cited the retailer's solid credit metrics and very good liquidity as well as expertise in merchandise and marketing as well as its portfolio of well-recognized brand names.
The rating agency, however, also referred to Limited Brands' history of shareholder friendly financial policy. "Although Limited Brands has most recently only used excess cash to make $1.3 billion in special dividends, its credit agreement provides it with tremendous flexibility to make debt financed dividends and share repurchases," it asserted.
Hence, Tuesday's announcement that it would borrow money and use it to buy back stock.