Weak equity performance and return on investment among select U.S. investment grade corporate issuers could pose credit risks as management teams seek to maximize shareholder value at the expense of bondholders, according to a Fitch Ratings report.
For its analysis, Fitch screened U.S. investment grade corporates according to several equity performance metrics. Those companies that rank near the bottom versus their peers across several of these measures can be, in Fitch’s view, at heightened risk of engaging in shareholder value enhancing initiatives.
These include changes to operating profiles and/or capital structures. Of the 19 companies identified, 15 are in the low-to-mid ‘BBB’ category.
As measured by lagging returns on investment, corporate underperformance poses eventual risks for fixed-income holders, inviting equity-oriented actions, whether by internal or external catalysts. Negative rating actions may occur depending on the magnitude of any leverage increase for these initiatives, which include share repurchases, mergers and acquisitions, restructurings and/or spinoffs.
The underperformers identified in Fitch’s analysis are heavily focused on technology companies, with six of the companies being part of this sector. U.S. technology companies continue to mature in non-emerging markets, resulting in slower growth and accounting in part for lagging equity performance.
For details, see the full report Lagging Equity Performance Unveils Potential Risks for Bondholders