We’re improving our models for the Total Debt metric used in our Credit Ratings for Financial and REIT companies. The improvement is to classify all Repurchase Agreements as part of Total Debt.

Repurchase agreements (repo) are a form of short-term, usually overnight, borrowing for dealers in government securities. In the case of a repo, a dealer sells government securities to investors and buys them back the following day at a slightly higher price. The (usually) small difference in price between the purchase and selling prices is the implicit overnight interest rate. Repos are typically used to provide short-term liquidity.

We had previously excluded repurchase agreements from our calculation of Total Debt for Credit Ratings due to their super-short, overnight duration, which we took to mean they did not last long enough to be material.

However, upon further review, we see that these repurchase agreements are highly recurring. Many overnight repurchase agreements are reestablished each day, which, effectively, makes them a longer term and material form of debt financing.

Given those findings and the fact that there is an implied interest expense associated with repurchase agreements, we have decided to include repurchase agreements in our calculation of the Total Debt used for Credit Ratings.

This modeling change will impact the Credit Ratings of only 89 companies in the current period. We expect 396 companies to be impacted throughout all history.

These changes will be live on our site on 7/28/23.

This article was originally published on July 25, 2023.

Disclosure: David Trainer, Kyle Guske II, Hakan Salt, and Italo Mendonça receive no compensation to write about any specific stock, sector, style, or theme.

Questions on this report or others? Join our Society of Intelligent Investors and connect with us directly.

Click here to download a PDF of this report.

Leave a Reply

Your email address will not be published.