Fitch: Shareholder-Friendly Actions Ongoing Risk for Bondholders

Tue Feb 25, 2014 10:11pm IST

(The following statement was released by the rating agency) NEW YORK, February 25 (Fitch) Shareholder-friendly actions such a stock buybacks or special dividends are an ongoing risk to corporate bondholders as borrowing costs remain historically low, Fitch Ratings says. While most stock buybacks and dividends are done in a credit-neutral manner, shareholder-friendly actions continue to drive a steady flow of downgrades and negative outlook changes. Fitch took six negative rating actions on U.S. corporates during 2013 due at least in part to share repurchases, similar to the number of such actions in 2012 and down from the 13 actions of 2011. Most of these actions in 2013 involved 'BBB' rated issuers, while the majority of actions in 2011-2012 involved issuers in the 'A' and 'AA' categories. This highlights the fact that even 'BBB' rated issuers currently face little cost in terms of market access or borrowing rates from moving one or two notches down the rating scale. Special dividends by non-investment grade companies that were LBO'd in the mid to late-2000's but have yet to be sold or taken public are also an ongoing risk. Examples include retailers Michael's Stores and NBTY, Inc., each of which paid sizable dividends during 2013 financed with PIK toggle notes issued at the holding company level. Aerospace/defense company TransDigm Group, Inc. paid a special dividend financed with a term loan and notes. Fitch downgraded one company in 2013 due to a special dividend, compared with two dividend-related actions in 2012 when companies were anticipating higher tax rates that took effect on Jan. 1, 2013. In total, non-investment grade companies obtained $50 billion in loans and $16 billion in new bonds during 2013 at least in part to pay sponsor dividends, in line with 2012 when a sizable portion of the dividends were paid in anticipation of higher tax rates. Negative rating actions in 2013 due at least in part to a more shareholder-friendly posture were spread across sectors. Two actions involved aerospace/defense companies (Northrop Grumman and TransDigm Group), and one action occurred in each of the telecom (CenturyLink), pharmaceutical (Merck), energy (Occidental Petroleum), chemical (CF Industries) and home services (ADT Corp.) sectors. Over the past three years, negative rating actions have been concentrated in the pharmaceutical/health care, media/telecom and retail sectors, which are relatively stable and cash generative in nature and therefore conducive to higher shareholder distributions Contact: Philip Zahn, CFA Senior Director Corporates +1 312 606-2336 Kellie Geressy-Nilsen Senior Director Fitch Wire +1 212 908-9123 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available on www.fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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