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DuPont wars: 'Conservative' CEO vs 'negative' billionaire

Downgrade warning if activist gets company to split

A campaign by billionaire investor Nelson Peltz and his Trian Fund Management to raise cash by breaking up the DuPont Co. "increases the risk of a potential deterioration in credit quality" and the likelihood the Wilmington industrial giant won't pay back bondholders, writes the Standard & Poor's credit rating agency in a report to clients today. S&P posted a "negative outlook" on DuPont's A credit rating on fears the company, led by CEO and Chairman Ellen Kullman, might cave in to activist pressure and load up on riskier debt.

"In our view, existing credit quality could deteriorate if DuPont's businesses split up, weakening the current business risk profile, or if this escalation increases the likelihood that management's commitment to its current credit quality wavers, weakening the financial risk profile," according to Standard & Poor's credit analyst Paul Kurias.

Most of DuPont's businesses are best kept together, Kurias adds in his report: "We regard DuPont as having better scale, scope, and diversification than many peers, including Air Products & Chemicals Inc., Sherwin-Williams Co., and PPG Industries Inc. Any potential split that results in a weakening of this particular strength could have negative consequence."

Kurias' report reads as if Peltz's plan would hit DuPont as hard as a recession:

A) Recession vs DuPont: "We could lower ratings if credit measures weakened such that [the ratio of funds-from-operations to] debt appeared likely to remain below 35%. With DuPont's current portfolio of businesses, we think this could occur if revenues contracted by 3% to 4% and [earnings before interest, taxes, depreciation, etc.]  margins were two percentage points lower than we expect"

B) Peltz vs. DuPont: "We could also lower the ratings if activist shareholder pressure or other factors caused shareholder rewards to increase beyond our current expectations... (or) if a break-up... meant that we no longer viewed the business risk profile as being at the very high end of the "strong" category... or if adverse litigation stretched the financial profile. We could also lower ratings if we reassess our view of management and governance, and consider it less favorably than we currently do."

In short, for its lenders and bondholders, DuPont is better together: Even the planned separation of DuPont's "Performance Chemicals" businesses into a new company, Chemours, which is supported by both Kullman and Peltz (though Peltz thinks it's not nearly enough), could raise risks from a bondholder's point of view, Kurias concluded.

Separately, Carol Levenson, veteran bond analyst for Gimme Credit LLC, in a report to clients called S&P's report "curious." Not because she disagrees with its conclusion: "Obviously, if Mr. Peltz gets his way, it would be severely negative for current bondholders."

But, Levenson adds, "our position has been that he won't get his way." While noting DuPont agreed to sell its Wilmington theater (whose existence Peltz has criticized) the day after Peltz threatened to run four insurgent board candidates in April's election, the move had "greater symbolic than financial significance," and the stock barely moved in trading today.

More important, adds Levenson: While many companies eventually give persistent activists who show signs of swaying investors a seat or two (and accept at least some of their restructuring suggestions), "DuPont thus far has shown no indication of being willing to do this. We still believe DuPont's financial conservativism will prevail."