Bondholders being hurt by activist shareholders
The increase in shareholder activism over the past few years has generally been a boon for the stock prices of targeted companies, but the proliferation of campaigns focused on returning value to equity investors is a growing concern for corporate bondholders, says a new report from Moody’s Investors Service.
“Shareholder activism has been gaining ground in North America since about 2011 and shows no sign of losing momentum in early 2014,” said Chris Plath, a Moody’s vice-president and senior analyst. “This suggests corporate bondholders could face a rising tide of credit-negative events as the year progresses.”
The credit ratings agency said the number of activist campaigns has ballooned in recent years, with hedge funds and investment advisors pursuing 220 targets in 2013, up from 209 in 2012 and 179 in 2011.
The tally roughly jibes with statistics from Activist Insight, which show 237 global campaigns last year and 54 this year.
The London-based research firm said activists publicly targeted 23 companies in February, including 20 U.S.based firms and two Canadian ones — InnVest REIT (by Orange Capital Corp.) and Equity Financial Trust Co. (by Smoothwater Capital Corp.).
“The latter was technically the end to a campaign that first began last year,” said Activist Insight’s managing editor Josh Black.
But Mr. Plath said increased investor activism tends to be a negative for bondholders, a point echoed by many others, including credit analysts at RBC Capital Markets who have also flagged their concerns regarding activist-driven shareholder initiatives in recent months.
Activism in some instances has helped credit profiles by imposing greater financial and capital discipline or by focusing on a company’s corporate governance practices. But it more commonly jeopardizes cost-savings initiatives and contributes to deteriorating credit profiles by encouraging potential targets to act pre-emptively and reward “potentially restive shareholders,” said Mr. Plath.
“In 2013, for example, ADT Corp. (Ba2 stable), BMC Software Inc. (Caa1 stable) and Nuance Communication Inc. (Ba3 stable) were all downgraded in actions that were at least influenced by responses to activist pressure,” he said.
The analyst said activists primarily want cash-rich companies to act more aggressively and enhance shareholder value through buybacks and dividends.
Low interest rates have also encouraged them to act, because they allow targeted companies to more easily take on incremental debt to fund share repurchases, special dividends and other measures aimed at improving shareholder rewards.
“Activists are commanding ever-growing war chests as they attract more inflows, which are allowing them to go after larger companies,” Mr. Plath said. “They have also gained ground as institutional investor and media perceptions have changed. Once viewed as uncouth 1980s-style corporate raiders chasing quick rewards, activists are now more often viewed as agents of longerterm change for the good.”
He expects activist activity in the future to focus on larger companies and sectors such as technology, health care, energy and retail.
“The technology sector continues to experience the most shareholder activism, accounting for a quarter of all 2013 activist campaigns among both rated and nonrated companies,” he said.
“With their large cash balances, minimal debt levels and small, if any, dividend payments, technology companies will continue to be targeted by activist investors calling for more aggressive capital returns.”