Fitch: UAL Avoids Proxy Fight, Negative Credit Impact Unlikely
OREANDA-NEWS. United Continental Holdings Inc. (UAL) avoided the distraction and expense that generally accompanies a proxy battle, according to Fitch Ratings.
The airline Tuesday settled with activist investors aiming to nominate six independent directors to the company's board. Fitch does not view the settlement as a surprise given an increased propensity for settlements in lieu of drawn-out proxy battles and that United was in a vulnerable position due to its CEO's recent health condition and management turnover during the past year.
Credit implications of the change to the makeup of United's board aren't completely clear at this time, but Fitch does not expect them to be negative. The activist investors are not advocating for short-term returns in the form of higher buybacks or dividends but, rather, largely pushing for the types of things that United is already working on, including improving employee relations, customer service and operational performance. Fitch would view successful execution of those goals as a meaningful step toward further improving UAL's credit profile.
Fitch upgraded United's IDR to 'BB+' from 'BB-' and revised the Rating Outlook to Positive from Stable on Sept. 18, 2015 due to the company's improving credit metrics, cost savings and stronger balance sheet. While a distraction, a proxy fight in and of itself would have been unlikely to cause a negative rating action. UAL's settlement agreement has not been filed publicly, but Fitch anticipates standstill provisions that will allow UAL to execute its strategy without activist disruption for a period of time and possibly place a cap on the activists' ownership.
As highlighted in Fitch's special report "Activist Activities: Fall 2015 - Nonfinancial U.S. Corporate Campaign Case Studies and Profiles of Notable Activists," the credit impact of activism varies. Moreover, corporations have been working more constructively with dissident investors that gain board representation. While activists are better able to affect change from the boardroom, with their presence often resulting in accelerating efforts to enhance underlying financial performance and shareholder returns, not all result in weakening credit profiles; some campaigns are even neutral to mildly positive.
Altimeter Capital Management and PAR Capital Management together own just over 7% of United's common stock, making the hedge funds one of United's top shareholders on a combined basis. The settlement includes two board seats for the activists and the appointment of a mutually agreed independent director within six months, after United had already added three new non-activist independent board members in March.