Mutual funds: News
Shareholders Gain, Creditors Often Lose, Says S&P Report on stock boosting deals 30/08/2006
Author: Lianna Brinded
As institutional investors have sought to bolster shareholder returns in recent years by engaging in shareholder-enhancing deals, such as stock buybacks, extra dividends, leveraged buyouts, or corporate restructurings, Standard & Poor's believes that the impact of such deals on credit quality is very rarely positive, occasionally neutral, and too often negative.
These conclusions are contained in a report released today by Standard & Poor's Ratings Services entitled "Top 10 Recent Stock-Boosting Initiatives: As Shareholders Gain, Creditors Often Lose."
"There is a growing appetite among corporate executives to use their balance sheets to the benefit of their shareholders," says Standard & Poor's Managing Director John Bilardello. "The resultant rise in debt and the corresponding reduction in cash supporting these obligations has been a primary factor underlying negative ratings activity."
The report will be the cover story in the August 16 special issue of Standard & Poor's CreditWeek, the investment research leader's weekly magazine on credit risk. The special issue will include other reports to be distributed over the coming week looking at the credit impact of shareholder-friendly initiatives.
Such shareholder initiatives often depend on added leverage to get them off the ground. But the companies that issue bonds or take out bank loans to buy back shares, purchase a company (their own or some other), or provide a dividend to shareholders do not always have the financial strength to maintain their credit rating after initiating these strategies.
Even if the effort to boost the stock price succeeds, everyday business pressures persist. A spike in commodity prices, the loss of a key customer, an unfavourable regulatory ruling, or an industry-changing technology can wreak havoc with carefully crafted financial plans and leave a company weakened.
