Bond Ratings: Another M&A Casualty?

Credit-rating agencies frequently downgrade the paper of M&A participants shortly after a mega-deal is announced, either because the buyer takes on debt or pays a hefty price that dilutes earnings and cash flow.

“Redundant” employees aren’t the only people who dislike mega-mergers; bond investors aren’t too thrilled, either.

Last year Moody’s Investor Service revised ratings downward 106 times on $139 billion of investment-grade debt and preferred securities related to mergers and acquisitions, according to Dow Jones. Just 33 of those downgrades affected $76 billion of debt and securities, added the wire service, citing Moody’s chief economist John Lonski. “On balance, there has been a weakening in credit worth,” Lonski told Dow Jones.

“Your ‘A’ credit may not be an ‘A’ when you wake up in the morning,” added Rohit Sethi, a research director at Aladdin Capital Management LLC, according to the wire service.

For example, earlier this year Moody’s downgraded Dow Jones & Co.’s senior unsecured debt two notches, to A2, after its recent acquisitions of a number of properties, including MarketWatch Inc.

After Eastman Kodak announced that it would buy Creo Inc. for $900 million, Fitch downgraded Kodak’s senior unsecured debt to double-B-plus, its highest speculative-grade rating, from triple-B-minus, its lowest investment-grade rating. Moody’s placed Kodak’s Baa3 senior unsecured rating on review for possible downgrade.

The four largest credit-rating agencies placed Proctor & Gamble Co.’s rating on review or watch for downgrade after it announced its planned acquisition of Gillette Co. last week, according to Dow Jones.

And after SBC Communications Inc. announced plans to buy AT&T Corp., Fitch placed SBC’s A-plus senior unsecured debt rating on “rating watch negative,” reflecting the ratings agency’s “concern regarding the prospects for the moderately higher business risk profile” of SBC following the completion of the deal.

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