Here’s yet another purpose for finance chiefs to be wary of shareholder activist strategies: ever more, they guide to downgrades or other adverse credit rating steps, in particular for businesses with previously weak credit ratings.
To be obvious, most activist strategies do not guide to modifications in credit ratings, credit outlooks, or the placing of the corporation on “credit observe.” But according to a report launched by S&P World wide Ratings on Wednesday, when strategies do guide to ratings steps, the vast majority of the time individuals steps are adverse. Twenty-one particular of the 26 rating steps triggered by investor strategies in 2020 were being adverse, up from only 7 five years back.
Activists targeted typically financial commitment-quality businesses in 2020. But businesses in the “BBB” rating types, the tiers just higher than “junk,” noticed the greatest variety of rating steps and downgrades.
Shareholder activist M&A or break-up strategies ongoing to be the major contributor to rating modifications among the nonfinancial and monetary issuers, the agency mentioned, adopted by strategies focusing on cash constructions.
“The most typical path to a [rating downgrade related to M&A] was overleveraging during a merger or a break-up that adversely affected the company’s monetary threat profile,” S&P said.
For instance, S&P decreased Tech Facts into junk territory past June soon after Apollo Management’s takeover provide proposed issuing an extra $five.five billion in debt. That “pushed the [company’s] professional forma modified leverage beneath the preceding downside cause,” S&P said. “Additionally, we be expecting[ed] the company’s monetary policies to grow to be extra intense underneath the new possession.”
Activist-led cash framework modifications are also normally credit-adverse, S&P mentioned, simply because activists normally demand extra shareholder-friendly monetary policies.
As an instance, S&P pointed to an incident past November when the minority shareholders of a French procuring heart proprietor campaigned for rejecting a cash improve intended to reduced general leverage. When the improve was voted down, S&P approximated that the corporation would not be capable to keep its leverage ratios. S&P downgraded the corporation one particular notch.
Shareholder activism in Europe led to as a lot of downgrades as it did in the U.S. in 2020. The rise in strategies “was mostly pushed by the even now escalating perception by large U.S. activist traders that European corporates are ripe for M&A-pushed benefit creation,” S&P said.