TO UAM, $1B DEBT IS NO BIG WHOOP

United Asset Management Corp., a company that is already deep in debt, is signing even more IOUs to pay for its aggressive stock buyback program and to make acquisitions.

The Boston-based acquirer of investment firms recently completed the sale of $250 million worth of long-term senior secured notes. The private placement, UAM’s second in three years, brings to $1.1 billion the amount of debt on UAM’s books, a 30% increase from the $834.6 million in outstanding debt it had at the end of June.

“The initial use of the financing proceeds will be to pay down a portion of our bank debt,” says chief financial officer William H. Park, “leaving us with $500 million of unused credit capacity to support acquisitions and share repurchases.”

UAM, which oversees more than $210 billion in assets and 51 money managers, finished the first half of the year with $834.6 million of long-term debt on its books. With stockholder’s equity of $386.3 million, the company’s debt to equity ratio hit 2.2-to-1. That compares to 1.8-to-1 at the end of the first quarter and it doesn’t take into account the new debt UAM just assumed.

By comparison, Boston rival Affiliated Managers Group’s debt to equity ratio stood at about 0.7-to-1 at the end of the quarter.

Still, Alexander Paris Jr., an analyst at Barrington Research Associates in Chicago, isn’t worried about UAM’s heavy debt load. With raw earnings of $318 million last year and interest payments of $35.9 million, he says, UAM can cover its interest payments nine times over.

“They have a great capacity for this debt,” he says. “In fact, some of their lenders have even lifted (loan) covenants that were more restrictive than they needed to be.”

UAM is likely to use the money to pay for a stock repurchase program it kicked off in January. So far, UAM has purchased 6.5 million shares of its own stock, a figure which represents about 9% of the outstanding shares. The company declined to comment on how much it has spent on the stock buyback program, other than to say it paid $129 million for 5 million shares during the first half of the year.

The buyback program is intended to make the stock more attractive to investors. UAM shares closed at 26.25 on Tuesday, 13% below the 52-week high of $30.25 on Oct.7.

It may also use the money for acquisitions, but that scenario isn’t as likely. UAM’s main focus right now is plugging asset outflows. The company reported $4.3 billion in negative net cash flow during the second quarter. That’s on top of $4.7 billion it lost during the first quarter and $16 billion it bled last year.

To inspire managers to win new business, UAM recently introduced an incentive program rewarding affiliate executives with phantom stock, UAM stock options and revenue sharing. It’s also attempting to create awareness of the UAM brand and do a better job of marketing its more successful affiliates.

“They are probably less focused on external growth right now,” Mr. Paris says of UAM.