By Nicole Rutherford

One of Canada’s biggest credit card companies has used an interesting strategy to raise its stock values, boosting its revenue to help pay off monstrous legal fees that continue to grow.

As of September 2014 MasterCard Incorporated took on a $1.5 billion debt in order to buy back their own stocks from the public share pool in hopes of increasing their income, all to assist in paying off some very large legal fees from multiple class-action lawsuits based in the United States.

MasterCard is a publicly traded company, so a large portion of its shares are sold to the average Joe or Jane and traded on the international stock market. However, by repurchasing some of these publicly available stocks, there is suddenly more competition for what is available.

“Because of this purchase there’s now less common stock on the market,” Said Spencer Briggs, an experienced associate auditor with PW&C LLP in Vancouver, British Columbia. “Now their earnings per share went up and consequently their stock price went up.”

However, while this is a strategic move for quick cash, most companies try to avoid such weighty debts.

“In this case it’s cheaper to have a debt than to have outstanding equity,” Briggs said.

In other words, it’s better to have a loan than to have potential money—in this case shares—dangling in front of you. However, for MasterCard Inc. there was more than just potential profit to their story: in this case a huge series of legal settlements from class action lawsuits raging on since 2006.

While legal battles are nothing new for a company, especially one as recognizable as MasterCard Inc., this series of tremendous lawsuits left them paying out over $1 billion dollars in settlement claims—and the court procedures are still ongoing. This has made the company set aside nearly $800 million in estimation of what they will still have to pay.

As a result MasterCard Inc. took on the debt from an internal “Credit Facility”, which according to financial statements, is made up of “customers or affiliates of customers of MasterCard Incorporated.” This Credit Facility offers a low interest rate on the long-term loan to the mega company, and even offered them $6 million dollars of interest-free cash.

While no company representative could be reached for comment, in a financial statement MasterCard Inc. described that they would use any “borrowings under the Credit Facility… for general corporate purposes, including providing liquidity in the event of one or more settlement failures by the company’s customers”

In other words, they are intending to buy back their goods, sell it high, make some money and get themselves out of the settlement hole they are currently standing in.

This led the company to use most of the loan to increase its stock ownership by 22 per cent.

Will this help them out in the long run? It’s not always easy to determine in the world of stocks, but as Associate Professor of Sustainable Management at Carleton University, Dr. Sujit Sur said via email, “Given the low interest rates and the tax benefits on the interest payment, taking on debt to reduce equity (total shares outstanding) [it] is a smart move.”

Briggs also agreed, “All they’re trying to do is manage their cost of capital.” In other words, balance out their debts and earnings. “There is never a simple answer in accounting; everything works in conjunction.”

For the otherwise healthy company this means the loan is acting as a slow-working buffer, simultaneously paying off their legal costs while regaining cash with the regained stocks.