Thursday, May 23, 2013

Shareholder activism may be negative for credit

Equity investors might find it a bit surprising that the rating agencies are not necessarily all that excited about the recent wave of stock investor activism. In fact some view such aggressive investor involvement as risk to corporate credit. Instituting strong corporate governance is certainly a positive, but equity investors will also continue to insist that companies do something with their cash (see discussion), including paying dividends or buying back shares. That ends up helping shareholders in the short run but increases net leverage - which is not ideal for credit investors. And certain structural, management, and board changes that result from shareholder activism will conflict with the needs of corporate debt holders.
Fitch: - The unprecedented level of shareholder activism seen across the energy space has increased the tail risk of future unexpected shareholder-friendly actions for credit in the space, according to Fitch Ratings.

Activist campaigns and/or proxy-related issues have flared up widely across the energy sector this year at several key names including Hess, Nabors, Transocean, Chesapeake, and Occidental Petroleum. The net result of these campaigns has been a wave of changes on the corporate governance, financial, and operational levels.

... Financial changes such as new shareholder-friendly distributions include new or expanded buyback programs and new or expanded dividend payouts while operational changes include accelerated restructuring plans and asset sales.
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