S&P warns on DuPont's creditworthiness

DuPont's creditworthiness could be hurt if Nelson Peltz, an activist investor, succeeds in gaining board representation at the US chemicals company at a shareholders' meeting later this week, Standard & Poor's has warned.

Mr Peltz has amassed a 2.7 per cent stake in DuPont and has lobbied for a drastic overhaul - including a possible break-up of the chemicals company that traces its origins back over two centuries.

In a report published ahead of a vote on whether Mr Peltz' Trian Partners can win a seat on the board, S&P cautioned that an "increase in investor influence" would be bad for DuPont's creditworthiness and endanger its A credit rating.

"Even if the activist investors don't gain seats on the board, the prospect of a long drawn out battle could hurt the company's credit quality," said Paul Kurias, a credit analyst at S&P.

S&P's intervention underscores how rating agencies are becoming increasingly concerned that aggressive activist investors are spurring companies to tarnish their balance sheets by depleting cash balances or borrowing to buy back shares or pay dividends.

In a report published in March, Moody's highlighted how US companies were continuing to trim investment but were turning to debt markets to fund ever-larger shareholder returns - forecast to hit over $1tn this year.

"Prevailing non-financial corporate behaviour patterns will weaken credit quality in North America in 2015 and beyond, as companies limit capital reinvestment while increasing leverage to fund larger dividends, yet continue to be supported by debt investors with few alternatives," Moody's said in the report.

S&P said DuPont's main credit metrics were better than most other A- rated companies, and bond investors had so far reacted calmly to the battle between Mr Peltz and the company's management.

The yield of its $1.25bn bond maturing in 2023 has climbed from a low of 2.41 per cent in mid-April to 2.88 per cent on Monday, yet that is below where it traded at the start of the year, and beneath the average yield of the US Barclays Aggregate bond index, the main benchmark.

S&P already has a negative outlook on DuPont's rating - which means there is at least a one in three chance of a downgrade this year - and warned that a break-up would be another challenge to the quality of the company's corporate debt.

"DuPont's business strengths include the company's income stream diversity and its scale of operations. We believe a split of the businesses could erode these strengths, and weaken credit quality," S&P said.

Mr Pelz's fight for a presence on DuPont's board has won the backing of ISS, an influential shareholder advisory group, which said that the existing board and management were "more inclined to obfuscation than accountability," and argued that Trian's involvement may be "not simply desirable but necessary".

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