Activist Investor Efforts Increasingly Lower Credit Ratings
Here’s yet another reason for finance chiefs to be wary of shareholder activist campaigns: significantly, they direct to downgrades or other negative credit history score steps, particularly for firms with already weak credit history rankings.
To be obvious, most activist campaigns do not direct to modifications in credit history rankings, credit history outlooks, or the inserting of the enterprise on “credit watch.” But in accordance to a report launched by S&P World Scores on Wednesday, when campaigns do direct to rankings steps, the the greater part of the time all those steps are negative. Twenty-one particular of the 26 score steps triggered by trader campaigns in 2020 have been negative, up from only seven 5 a long time ago.
Activists targeted largely investment-grade firms in 2020. But firms in the “BBB” score groups, the tiers just over “junk,” noticed the finest selection of score steps and downgrades.
Shareholder activist M&A or split-up campaigns continued to be the largest contributor to score modifications amid nonfinancial and economical issuers, the company stated, followed by campaigns concentrating on money structures.
“The most common route to a [score downgrade relevant to M&A] was overleveraging for the duration of a merger or a split-up that adversely afflicted the company’s economical hazard profile,” S&P mentioned.
For case in point, S&P reduced Tech Knowledge into junk territory previous June immediately after Apollo Management’s takeover supply proposed issuing an supplemental $5.5 billion in debt. That “pushed the [company’s] professional forma adjusted leverage under the prior downside induce,” S&P mentioned. “Additionally, we be expecting[ed] the company’s economical insurance policies to turn into much more intense under the new possession.”
Activist-led money structure modifications are also frequently credit history-negative, S&P stated, for the reason that activists frequently demand from customers much more shareholder-helpful economical insurance policies.
As an case in point, S&P pointed to an incident previous November when the minority shareholders of a French procuring centre operator campaigned for rejecting a money raise intended to decrease in general leverage. When the raise was voted down, S&P approximated that the enterprise would not be able to sustain its leverage ratios. S&P downgraded the enterprise 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 campaigns “was largely pushed by the still rising belief by significant U.S. activist buyers that European corporates are ripe for M&A-pushed benefit generation,” S&P mentioned.
