Shareholder-friendly actions, such a stock buybacks or special dividends, represent an ongoing risk to corporate bondholders, says Fitch Ratings in a new report.
The rating agency says that 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 says it took six negative rating actions on U.S. corporates during 2013 due at least in part to share repurchases. It took a similar number of negative actions in 2012, and 13 in 2011.
The negative rating actions taken in 2013 occurred in several sectors, Fitch notes, including the aerospace/defense, telecoms, pharmaceuticals, energy, chemicals, and home services 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,” it says.
Special dividends by non-investment grade companies that underwent leveraged buyouts in the mid to late-2000’s, but have yet to be sold or taken public, are also an ongoing risk, Fitch says.