Activist Investor Efforts Increasingly Lower Credit Ratings

Here’s an additional rationale for finance chiefs to be wary of shareholder activist campaigns: increasingly, they guide to downgrades or other damaging credit rating score steps, primarily for corporations with already weak credit rating scores.

To be distinct, most activist campaigns do not guide to changes in credit rating scores, credit rating outlooks, or the putting of the enterprise on “credit observe.” But in accordance to a report unveiled by S&P World-wide Scores on Wednesday, when campaigns do guide to scores steps, the bulk of the time all those steps are damaging. Twenty-one particular of the 26 score steps brought on by trader campaigns in 2020 were damaging, up from only seven 5 many years back.

Activists specific generally financial commitment-grade corporations in 2020. But corporations in the “BBB” score categories, the tiers just higher than “junk,” noticed the best variety of score steps and downgrades.

Shareholder activist M&A or break-up campaigns continued to be the premier contributor to score changes between nonfinancial and financial issuers, the agency said, adopted by campaigns focusing on cash buildings.

“The most normal path to a [score downgrade connected to M&A] was overleveraging for the duration of a merger or a break-up that adversely influenced the company’s financial possibility profile,” S&P claimed.

For case in point, S&P decreased Tech Knowledge into junk territory final June just after Apollo Management’s takeover give proposed issuing an supplemental $5.5 billion in debt. That “pushed the [company’s] pro forma altered leverage beneath the previous draw back induce,” S&P claimed. “Additionally, we be expecting[ed] the company’s financial insurance policies to become extra aggressive below the new ownership.”

Activist-led cash composition changes are also typically credit rating-damaging, S&P said, due to the fact activists typically need extra shareholder-friendly financial insurance policies.

As an case in point, S&P pointed to an incident final November when the minority shareholders of a French purchasing center operator campaigned for rejecting a cash enhance intended to lower general leverage. When the enhance was voted down, S&P approximated that the enterprise wouldn’t be ready to preserve 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 increase in campaigns “was largely driven by the continue to rising belief by large U.S. activist traders that European corporates are ripe for M&A-driven price development,” S&P claimed.

activist shareholderscredit score, S&P