Moody's: Short-term shareholder activists degrade creditworthiness of companies

By Angela McDaniels

Seattle, June 12 - Corporate bonds rated by Moody's Investors Service often experience an erosion of credit quality when management cedes ground to short-term shareholder activists, according to an agency report on shareholder activism.

Moody's concluded that the influence of shareholder activists on the behavior and decision-making of large public companies is both rising and negative.

"Demands by short-term activist investors are generally negative for credit quality, especially when they result in the break up of the company or the sale of significant assets with the proceeds passing to shareholders," Moody's Mark Watson said in the report. Watson is a co-author of the report along with Francis Byrd and Drew Hambly.

"Just as bad for creditworthiness are significant increases in dividends or share purchase programs, a more aggressive growth strategy, or a more leveraged financial strategy."

Watson added that short-term shareholder activists typically focus on companies that exhibit certain characteristics, such as strong balance sheets, relatively low leverage or entrenched or complacent management teams.

The most common demands by short-term shareholder activists are to push for strategic changes, including acquisitions, asset sales or the sale of the company, according to the report. Other demands might include share buybacks, increased dividends, operational changes or governance changes like board representation or senior management changes.

"These are potentially significant demands, and any one of them has the potential to change the company's credit profile over the short to medium term. The activists also distract management from running the business to deal with their demands, eating up corporate resources and wealth," Watson said in the report.

The report includes an appendix of prominent activist efforts, the actions of targeted companies and how the credit positions of those companies fared.

"While we typically found an erosion of credit quality, we also found a minority of cases in which some actions were credit neutral to the company's long-term position," Watson said. "This is especially the case when, following activist intervention, a company embarks on a more focused strategy, moves away from expansion into non-core business areas and makes significant improvements to practices, including more disciplined capital allocation."

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