Two Years After Lehman, Corporate Credit Is Flowing Again

As the second anniversary of Lehman Brothers' collapse approaches, market commentators have been analyzing how surprisingly constant many features of the financial landscape have remained. Several Wall Street powerhouses remain too big to fail, for example, and many critics have argued that financial markets remain as exposed to shocks as ever, despite plenty of lip service paid to avoiding another crisis.

But when it comes to one of the most profound economic impacts of the 2008 meltdown -- the downright seizure of credit markets -- things could hardly be more different now than during the height of the crisis. While credit evaporated in the wake of Lehman's demise, companies with strong balance sheets are now seeing a deluge.

The impact of this dramatic turnaround continues to boost stocks in new ways. Witness reports of Microsoft's (MSFT) plans to finance buybacks and dividends through new debt issues even though it already sits on piles of cash.

Unanswerable Questions

Compare that to the onset of the financial crisis. Just two weeks after the collapse of Lehman, AT&T (T) CEO Randall Stephenson shocked investors by saying the iconic company -- generally seen as a safe haven because of its steady business -- was having difficultly securing short-term loans to fund business operations.

AT&T's woes were part of the prevailing paranoia. Who was holding toxic assets, and how little were they worth? Answers were impossible to find in the wake of Lehman's bankruptcy as it became clear that nearly worthless securities were scattered all over. As counterparty risk spiked, so did the rates banks charged each other for overnight loans. And even the bluest-chip companies worried about basic funding just to keep the lights on.

Now, though, just two years later, credit could hardly be easier to come by for corporate behemoths holding plenty of cash. Companies like IBM (IBM) are able to get three-year loans for a stunning 1%, and banks are racing to line up debt financing for blockbuster acquisitions.

Creating an Upward Spiral for Equities?

Microsoft plans to raise as much as $5 billion in debt to fund a return of capital to shareholders through increased stock buybacks and dividends, according to reports on Sept. 13. Microsoft shares spiked 5% on the news, meaning that more than $10 billion in equity capitalization was created for the software giant, whose market cap now approaches $220 billion.

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Microsoft may now be able to use the funds to boost dividend yields ahead of the 2% offered by the S&P 500, according to some analysts. "We expect Microsoft's board to elect to raise their dividend to a level where the yield will meet or exceed the index average, even with material accretion in the share price," Katherine Egbert, an analyst at Jefferies & Co., wrote in a research note today.

Other such corporate titans that now enjoy easy access to credit could increasingly follow suit. Rising payouts to shareholders could continue to make stocks increasingly attractive relative to bonds and lead to an upward spiral for equities.

Of course, investors should note that many negative conditions remain, despite promises of sweeping changes since Lehman's collapse. But when it comes to the most important factors that move markets -- such as corporate cash flows and credit quality -- things could hardly be more different.