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Don't Even Mention It

A company's credit rating may be downgraded even before a deal is signed.
Alix Stuart, CFO Magazine
September 27, 2006

Trying to boost your stock price with a spin-off, stock buyback, or debt-financed acquisition, or by entertaining a leveraged-buyout offer? You may have to contend with lower credit ratings sooner than you thought.

With corporate-bond issues by investment-grade companies up 72 percent in the first half of 2006, credit-ratings agencies say they may lower ratings upon the announcement of such an event.

"Often the final rating isn't [issued] until the transaction closes. But in some cases, where the motivation is clearly pressure from shareholders," the rating will drop immediately, says John Olert, managing director at Fitch Ratings. He says there is no need to wait when it's pretty clear that the goal is to reward shareholders. A recent Fitch survey found that such moves were the top concern of 78 large bond investors.

In July, the major agencies immediately put HCA on review for potential downgrade after it accepted a $33 billion buyout offer from major LBO firms. Kinder Morgan received the same treatment back in May upon mere receipt of an LBO bid, even though by August no decision had been made to accept the bid. The Tribune Co. was slashed to junk status when it announced in May that it would use $2 billion in debt to repurchase shares, even though such buybacks can take months or even years to complete.

Pamela Stumpp, Moody's Investor Services managing director, says that slightly more than 75 percent of this year's so-called fallen angels, or companies that have been downgraded from investment to junk, are associated with M&A transactions or stock buybacks, creating the need for earlier warning signs for bondholders.

In late July, Moody's put out a request for comment on specific guidelines for circumstances under which it would downgrade a company upon announcement of a credit-eroding event, instead of just putting it on watch. Stumpp says the move is timely because "stock prices are fairly flat, and many companies are considering what they can do to change capital structures."




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