American finance: Risk on

A BUSINESS with less risk than ADP would be hard to imagine. It dominates the processing of payrolls and health-care contributions in America. Both of these markets demand massive economies of scale and a reputation sufficient to pacify nervous human-resources departments and ever-more-intrusive regulators, two attributes that favour an established player. Current returns are good; future returns look likely to be the same.A benign outlook, however, was not enough to prevent the loss in April of rare AAA credit ratings, the best possible, from Standard & Poor’s and Moody’s. The cause of ADP’s downgrade was entirely voluntary: the company wants to spend the $700m it expects from spinning off a small division on share repurchases, instead of keeping or otherwise investing the cash.ADP is hardly the only firm levering up its balance-sheet, by adding more debt relative to equity, thus adding a dollop (or more) of risk. On May 20th Morningstar, another ratings service, noted that Time Warner was issuing new debt specifically to increase its leverage. The proceeds will probably be used to pay for share buy-backs. Across the economy, debt issued by...



from The Economist: Finance and economics http://ift.tt/1nZThk3