Ratings agency Moody’s Investors Service has fired a shot across the bow of shareholder activists, warning that their increasingly successful efforts are bad news for bondholders.
In a report this week, Moody’s said that activist-led companies are at increased risk of default and could suffer ratings downgrades. The agency cited activists’ frequent demand to return cash to shareholders, which it warns could decrease a company’s debt cushion.
“Activism is rarely good news for creditors,” Moody’s concluded.
Unfortunately for bondholders, they can expect more of it: Moody’s said it saw campaigns against 56 companies it rates last year, and expects to see more targeted in the future.
It’s easy to see why: According to Factset, activist investors won more board seats last year than in any year since 2009. “The widespread support activists are getting from mainstream institutional investors is undoubtedly a key driver of the increased willingness of companies to offer up board representation,” it wrote.
Moody’s report comes after it weighed in on Corvex Management’s bid to oust the board of directors at CommonWealth REIT. While that campaign has won the backing of major proxy advisors and is expected to succeed, Moody’s said on Friday it was reviewing CommonWealth’s debt for a possible downgrade, pending the outcome of the vote.