Acquisition Risk Can Have An Impact On Ratings, Says S&P
NEW YORK Sept. 11, 2006--Virtually any company can become a takeover target, according to "Acquisition Risk And Its Effect On Ratings," published today by Standard & Poor's Ratings Services.
Because we recognize that the potential for an outside entity launching a takeover bid is so broad and cannot be predicted, our ratings do not focus on this risk; the potential for the acquisition of a rated company therefore is, treated as a random event," said Sol Samson, Managing Director, Corporate and Governments, for Standard & Poor's. (By contrast, the propensity for certain companies to take on risk and transform the existing financial profile can be very predictable.
But takeover activity has been very robust of late. Fixed-income investors increasingly are growing nervous about lending to companies--especially investment-grade companies--that may be transformed into weak credits in the wake of a buy-out. Typically, acquisition-related debt is placed on the company-and the new owners aggressively take on still more debt in order to extract cash.
Some recent bond issues have incorporated protective 'change-of-control' covenants in order to alleviate such concerns. Examples include: Cintas Corporation and Carlisle Cos. We expect use of such covenants will become more commonplace, if not standard.
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