The growing trend for companies to boost their share price through asset sales or borrowing to fund a dividend increase or share buy-back is increasing the risk of debt downgrades, ratings agency Standard & Poor's said.
"There is a growing appetite among corporate executives to use their balance sheets to the benefit of their shareholders," said Standard & Poor's Managing Director John Bilardello.
"The resultant rise in debt and the corresponding reduction in cash supporting these obligations has been a primary factor underlying negative ratings activity," he said.
Companies such as car rental firm Hertz Corp and fast food chain Wendy's International Inc saw credit downgrades after using debt to pay for dividends or spinning off a unit, the rating agency said in a report on Thursday.
Wendy's private equity investors Highfield Capital Management, Sandell Asset Management Corp and Trian Fund Management LP "are aggressively seeking to maximise their stake," resulting in the company spinning off a major unit and a $1 billion share buy-back, the report said.
Standard & Poor's cut the company's rating to BBB-, from BBB+ in April, after the partial spin off of Tim Horton, Wendy's Canadian coffee and doughnut chain.
The downgrade came because of "the lack of diversification that will result from the spin-off, the company's more aggressive financial policy, a reduction in cash flow, and an increase in leverage," Standard & Poor's said.
In June, the agency also put Hertz on watch for a potential downgrade after the company incurred more debt to complete a $1 billion dividend recapitalization or in other words a dividend partially funded with debt.
The dividend came only six months after a group of private equity investors, including Merrill Lynch Global Private Equity Corp and the Carlyle Group, bought Hertz from Ford Motor Co, Standard & Poor's said.
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