NEW YORK, Feb 1 (IFR) - A flurry of activity by activist
investors seeking to improve shareholder returns at some major
US companies has cast a shadow on corporate bond markets already
spooked by rising Treasury yields.
Activists, including Carl Icahn and some high-profile hedge
funds, are clamoring for change from the management of
Transocean, Hess Corp And Nabors Industries
among others, sending share prices soaring but battering
Strategists say the demands for change reflect confidence in
the economic recovery and optimism that companies have got
through the 2007-2008 crisis and can now resume investing for
growth. But bondholders should brace for a bumpy ride.
"Companies need to be challenged and regularly prodded to
revamp products, strategies, and sometimes even management, so
that they continue to deliver value to their shareholders," said
Edward Marrinan, head of macro credit strategy at RBS
"The rise in investor activism is a sign of the corporate
sector's gradual reemergence of confidence in the global
economy. These actions are likely just the start of a trend of
shareholder assertiveness which will gain momentum as the year
unfolds," he said.
The burst of activity comes as investors, weary of the
central-bank fuelled low-rate environment, are taking on more
risk and allocating capital back into the equity markets and
structured products. Some are now pushing to ensure their
risk-taking is supported by management boards with strategies
that generate shareholder value.
"Many of these companies' share prices are underperforming
because managements were more focused on surviving the crisis of
2008-2009. But now as we move beyond the crisis, shareholders
are demanding that companies become less inward focused and take
steps to maximize their returns," said Marrinan.
CLAMORING FOR CHANGE
Icahn last week urged the board of offshore driller
Transocean to return capital to shareholders by declaring a
dividend of at least US$4 per share at the company's next annual
meeting. Icahn came up with the demand after disclosing a 5.61%
active stake in an amended 13-D filing released Friday after the
The news sent shares of Transocean up 3% in after-market
trading, but bond spreads have widened sharply on the news.
Transocean 3.8% 2022s are 15 basis points wider on the week
at Treasuries plus 193bp and the 6.8% 2038s are 36bp wider at
254bp over Treasuries. Five-year credit default swaps have
widened by 28bp to 173bp-181bp.
On Tuesday, hedge fund Elliot Management Corp released a
letter detailing proposals that included breaking up oil and gas
company Hess to enhance shareholder returns. Elliott, which
holds 4% of Hess, said it believed Hess was undervalued due to
the company's "unfocused portfolio and poor management."
"The undervalued stock is a result of a failure of corporate
governance," said John Pike, senior portfolio manager at Elliot
The stock soared 9% on the day after the letter was
published. But Hess 5.6% 2041s are trading 58bp wider on the
week at Treasuries plus 202bp. The company's 8.125% 2019s are
57bp wider at Treasuries plus 210bp. Five-year credit default
swaps have widened by 40bp to 174bp-184bp.
Pamplona Capital, a fund backed by Russian billionaire
Mikhail Fridman's Alfa Group that owns a 9.3% stake in Nabors
Industries, recently voiced concern about the company's share
price performance. Pamplona said it has met with management to
discuss the issue.
Spreads on the company's 5% 2020s and 4.625% 2021s are 16bp
wider at Treasuries plus 226bp and 227bp, respectively.
Five-year credit default swaps have widened by 15bp to
Meanwhile, 10-year US treasuries were pushing against the
psychological 2% level this week. The spike dried up flows in
the primary US high-grade market and raised concerns that bond
investors will suffer losses in their portfolios if Treasuries
march up another 25bp-30bp. For more, see
The Federal Reserve this week signaled its intention of
continuing its strategy of keeping interest rates low for the
But the combination of a rise in demand for
shareholder-friendly actions, increased prospects for leveraged
or buyouts in a liquidity-flush environment and positive
economic trends have made bond investors more vulnerable to
losses in the medium to long term.
Investment-grade corporate bonds, with an average yield of
just 2.7% and a duration of 7.2 years, would suffer a 5% loss if
rates rise by one percentage point, according to Mike Gatlin,
director of fixed income at T Rowe Price.
The investment fund is recommending floating-rate loans or
leveraged loans as an investment option because they offer
yields in the 5%-6% range with less interest rate and credit
risk than high-yield bonds.
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