Activist Investor Efforts Increasingly Lower Credit Ratings

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Here’s another reason for finance chiefs to be wary of shareholder activist campaigns: increasingly, they lead to downgrades or other negative credit rating actions, especially for companies with already weak credit ratings.

To be clear, most activist campaigns do not lead to changes in credit ratings, credit outlooks, or the placing of the company on “credit watch.” But according to a report released by S&P Global Ratings on Wednesday, when campaigns do lead to ratings actions, the majority of the time those actions are negative. Twenty-one of the 26 rating actions triggered by investor campaigns in 2020 were negative, up from only 7 five years ago.

Activists targeted mostly investment-grade companies in 2020. But companies in the “BBB” rating categories, the tiers just above “junk,” saw the greatest number of rating actions and downgrades.

Shareholder activist M&A or break-up campaigns continued to be the largest contributor to rating changes among nonfinancial and financial issuers, the agency stated, followed by campaigns focusing on capital structures.

“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 financial risk profile,” S&P said.

For example, S&P lowered Tech Data into junk territory last June after Apollo Management’s takeover offer proposed issuing an additional $5.5 billion in debt. That “pushed the [company’s] pro forma adjusted leverage below the previous downside trigger,” S&P said. “Additionally, we expect[ed] the company’s financial policies to become more aggressive under the new ownership.”

Activist-led capital structure changes are also often credit-negative, S&P stated, because activists often demand more shareholder-friendly financial policies.

As an example, S&P pointed to an incident last November when the minority shareholders of a French shopping center owner campaigned for rejecting a capital increase meant to lower overall leverage. When the increase was voted down, S&P estimated that the company wouldn’t be able to maintain its leverage ratios. S&P downgraded the company one notch.

Shareholder activism in Europe led to as many downgrades as it did in the U.S. in 2020. The rise in campaigns “was largely driven by the still growing belief by large U.S. activist investors that European corporates are ripe for M&A-driven value creation,” S&P said.