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Alan Shepard

Alan Shepard (ASAP 2011) Weighs in on P&G Trading

by Staff Monday, July 23, 2012

Applied Security Analysis alumnus Alan Shepard, a fixed-income analyst at Madison Investment Holdings Inc., provided commentary in a recent Bloomberg article looking into the influence of Pershing Square CEO Bill Ackman on derivatives trades linked to P&G debt.

According to Bloomberg, traders are pushing derivatives linked to debt of P&G – the largest consumer-packaged goods company – to the riskiest level relative to Colgate-Palmolive and lower-rated Unilever since 2009 on concern that Ackman will pressure the company to reward shareholders at lenders’ expense. The cost to protect P&G bonds from default has increased 10.2 basis points to 0.62 percentage point at 12:23 p.m. in New York since July 11, after Ackman bought a $1.8 billion stake in P&G.

Credit-default swaps on P&G debt are up from this year’s low of 48 basis points on April 3, according to prices compiled by Bloomberg. It now costs about $62,000 annually to protect $10 million of P&G debt, the most since July 2009. Swaps linked to Colgate traded at 44 basis points today with contracts on Unilever at 35.

“It’s obviously a concern,” Alan Shepard told Bloomberg regarding the measures to protect P&G from default. “Ackman has a history of “wanting to release shareholder value without too much concern from where the bondholders stand,” added Shepard in a telephone interview from Madison, Wisconsin. Shepard’s firm, Madison Investment Holdings Inc., oversees about $16 billion and holds P&G bonds.

P&G’s ratio of enterprise value to earnings before interest, taxes, depreciation and amortization of 11.34 times is less than the average of 12.47 among the world’s largest household products makers. Sales growth at the company declined for the third straight quarter to 1.51 percent in the period ended March 31, the slowest pace since 2009.

The 46-year-old Ackman is known for investing in companies he deems undervalued and urging changes he says will improve shareholder returns.

After Target Corp. rejected Ackman’s suggestion to spin off the land beneath its stores as a publicly traded real estate investment trust, the second-largest U.S. discount retailer behind Wal-Mart Stores Inc. said it favored selling its credit- card business, which Ackman supported. The chain also sold $4 billion of bonds to raise funds for stock buybacks he’d sought.

Market share for the world leader in both hair and laundry care has also declined for two years as Unilever expanded, Bloomberg data show.

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