A $12 billion debt sale announced by Home Depot on Tuesday would be the biggest test of demand for U.S. corporate bonds in four years but will likely find ample buyers, analysts said.

The massive financing would be the second-largest ever by a U.S. company, behind a $17.6 billion multi-currency offering by General Motors in 2003, according to Dealogic and Reuters data.

The funding is key to Home Depot's plans to buy back $22.5 billion in shares, a move that has boosted its shares by more than 6.0 percent since it was announced late on Tuesday. Home Depot is also using cash on hand and $10.3 billion in proceeds from the sale of its supply division to pay for the buybacks.

While this is a company that's in an industry that's very challenged, most people will say we're closer to the bottom than the peak in the housing cycle, said Bill Cunningham, head of global fixed-income research at State Street Global Markets in Boston. This is a company that's not going away.

Shares of Home Depot have been pressured this year as growth in its core retail business slowed amid the weakening U.S. housing market.

To assure enough demand for its massive debt offering, Home Depot will likely have to offer about 10 to 15 extra basis points in yield spread over similarly rated companies, investors and strategists said.


Yields on Home Depot's bonds have already swollen following warnings from rating agencies of multiple-notch downgrades because of the share buyback.

Spreads on Home Depot's 5.875 percent bonds due in 2036 have widened to 147 basis points more than Treasuries, up from 127 before the share buyback announcement, according to MarketAxess.

The cost of protecting Home Depot's debt against default in the credit default swap market rose by about seven to 10 basis points to 27 basis points, or $27,000 for every $10 million protected, market sources said.

Though Home Depot is using debt to do things unfavorable to bondholders, that may not hobble the bond sale, investors said.

At this point we all know that managements are working for shareholders, so it really shouldn't be a surprise, said Robert Bishop, portfolio manager for SCM Advisors in San Francisco.

Home Depot in particular was considered a likely candidate to do large buybacks, he said.

We actually anticipated they would come up with a more leveraged solution that would bring them to around mid- to low-triple B (ratings) -- that's why we don't own the bonds, Bishop said.

Strong global demand for fixed-income is keeping yields low, allowing companies to sell debt cheaply even as they do things detrimental to bondholders, said Jim Cusser, portfolio manager at Waddell & Reed in Overland Park, Kansas.

The smartest minds tell me that the economy is slowing because of housing, profitability isn't on an upward trajectory anymore -- maybe at best it's flat -- and yet deals are getting done at near historically tight spreads, he said.


For Home Depot, putting more debt on its balance sheet and boosting its share price makes the company less attractive as a target of private equity investors or activist hedge funds, said State Street's Cunningham.

They're not sacrificing the balance sheet completely the way a complete leveraged buyout would ... but they are making it more difficult for activist hedge fund players to give them a broadside and start to take control out of management's hands, he said. So I think it's a quite savvy move.

Despite the deal's size, it could get done as a combination of fixed- and floating rate debt sold in various currencies, said SCM's Bishop, noting that deals of a similar size were sold that way in the past by telecommunications companies.

WorldCom, for example, sold $11.9 billion in dollars, euros and sterling in 2001, while AT&T Corp. sold $10.1 billion that year in dollars and euros.

Home Depot is the kind of company that would have an audience in Europe and Asia, Bishop said.

Still, independent research service Gimme Credit said Home Depot had better offer belt, suspenders and a very generous spread when it comes to the bond market.

The company's lease-adjusted leverage target will be nearly triple the level it had in 2005, while without its supply division, the company will be even more vulnerable to the whims of the retailing environment, Gimme Credit analyst Carol Levenson wrote in a research note.