Lowe's Cos. is raising $2 billion in the bond market to financestock repurchases as the second-biggest U.S. home-improvementretailer boosts leverage to reward shareholders even as itsprofitability wanes.

Lowe's sold five-, 10- and 30-year debt yesterday, five monthsafter the company that sells products from flowers to washingmachines issued $1 billion of notes. The retailer may use proceedsto buy back shares, according to a regulatory filing. Lowe's plansto increase its leverage to as much as 2.25 times from 1.8 times,Robert Hull, Lowe's chief financial officer, told an earningsconference call in November.

That should raise concern among bondholders that theMooresville, North Carolina-based retailer will add to a $9.2billion debt load when earnings rise, according to BrookfieldInvestment Management Inc. The company plans to repurchase $4.5billion of stock annually until 2015 even after same-store saleswere little changed last year and margins narrowed.

“Lowe's is willfully increasing its leverage in order to returnmore cash to shareholders,” Carol Levenson of Chicago-based GimmeCredit wrote in a report yesterday. “Subdued home improvementspending and a still cautious consumer do not exactly scream 'Heyit's okay to take on more debt' to us.”

Lowe's sale yesterday was its biggest on record and accounts forthe remainder of the $3 billion of debt that Hull said the companywould take on by the end of this year as it boosts its ratio oflease-adjusted debt to earnings before interest, taxes,depreciation, amortization, share-based payments and rent. Thecompany sold $1 billion of notes two days after he spoke on theNovember conference call.

“When a company turns toward financial engineering, it kind ofturns me off,” said Joel Levington, managing director at Brookfieldin New York, which manages about $25 billion. “Any bondholder hasto be somewhat skeptical of the company given that they've changedtheir financial policies,” he said in a telephone interview.

Credit-default swaps linked to Lowe's debt jumped 9 basis pointsyesterday to 71 basis points, the highest level since Feb. 22. Thecontracts, which pay the buyer face value if a borrower fails tomeet its obligations, less the value of the defaulted debt, tradedas high as 107 basis points last year.

Swaps for Home Depot Inc., Lowe's larger competitor, rose 2basis points to 47 basis points. A basis point equals $1,000annually on a contract protecting $10 million of debt.

Builder Confidence

Confidence among U.S. homebuilders fell in April to athree-month low, a sign the industry is still trying to gain itsfooting as the country recovers from the worst financial crisissince the Great Depression, the National Association of HomeBuilders/Wells Fargo index of builder confidence showedyesterday.

Proceeds from the Lowe's issue may be used for general corporatepurposes including capital spending and acquisitions as well asshare buybacks, according to the regulatory filing. The companysaid in December it expected to repurchase almost $18 billion instock between 2012 and 2015, provided there aren't other uses forits cash.

The home-improvement retailer issued $500 million of 1.625percent, five-year notes that yield 80 basis points more thansimilar-maturity Treasuries, $750 million of 3.12 percent, 10-yeardebt at a spread of 115 basis points and $750 million of 4.65percent, 30-year securities at 155 basis points, Bloomberg datashow.

Lowe's shares fell 0.2 percent to $31.98 at 10:54 a.m. in NewYork. The stock has gained 26 percent this year to the mostexpensive price relative to earnings in almost two years, Bloombergdata show.

The company last raised its target for maximum leverage to 1.8times from 1.5 times so-called Ebitdar in 2010 after earlierlifting its target of 1.4 times in 2009, according to transcriptsof conference calls.

“This transaction is consistent with our previously announcedleverage target,” said Julie Yenichek, a spokeswoman for thecompany.

Moody's Investors Service downgraded the company's debt twolevels in November to A3 after the leverage increase was announcedin the conference call with analysts and investors, signaling amore aggressive financial policy that favored shareholders,according to Maggie Taylor, a senior credit officer at Moody's. Thecompany could be downgraded again if leverage using her firm'smeasures exceeds 2.75 times earnings or if earnings to interestexpense falls below 6.5 percent, she wrote in a Nov. 14 report.

“What happened today confirms the reason we downgraded Lowe's,”Taylor, based in New York, said in a telephone interview. “Clearlytheir financial policy has gotten a bit more aggressive.”

Rising Leverage

Lowe's posted a ratio of Ebitda to interest expense of 9.13 inits fiscal 2012 fourth quarter, Bloomberg data show. That's downfrom 11.09 in the similar period a year earlier.

“Certainly as leverage increases, the chances of them beingdowngraded also go up,” Alexander Diaz-Matos, an analyst atCovenant Review LLC in New York, said in a telephone interview.

Standard & Poor's yesterday rated the new debt A-,equivalent to the Moody's grade, with a “negative” outlook.

Sales by Lowe's stores open at least a year were flat in 2011,trailing Home Depot's gain of 3.4 percent. Its net income margindropped to 3.66 percent, from 4.12 percent in fiscal 2011,Bloomberg data show.

Lowe's may lag behind its competitor in sales growth again thisyear, according to Peter Keith, a Piper Jaffray Cos. analyst in NewYork.

In an online survey of 440 homeowners, Piper Jaffray found thatfour in 10 plan to spend more on improvements this year over 2011.Twelve percent are reluctant to spend because of declining homeprices, a lower percentage than Keith said he had expected, whichmay be a sign of “pent up demand getting released,” he wrote in anApril 16 note.

“There is no question that we are behind in certain areas,”William Doug Robinson, Lowe's senior vice president in charge ofinternational operations and customer support services, told theRaymond James Institutional Investors Conference on March 6. Lowe'shasn't distinguished itself from Home Depot, which attractsshoppers because it has more locations, he said.

Lowe's also plans raise its dividends as earnings increase tomaintain a one-third payout ratio, Robinson told the Raymond Jamesconference. It last increased its quarterly payment to 14 cents ashare on May 27 for its Aug. 3 dividend, and it will boost the rateto 16 cents for the corresponding period of this year on May 21,according to Bloomberg Dividend Projections.

“It is often the case that a retailer decides to ramp up itsshare repurchases using additional debt to finance this atprecisely the worst time for increasing leverage,” Levenson wrotein an e-mail. “With Lowe's we don't know where this intentionalleveraging might end.”

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