Credit firm says Nelson Peltz is bad for DuPont

Independent bond research firm Gimmie Credit downgraded the debt of the giant chemical company on Tuesday, saying Peltz’s pressure may end up forcing DuPont’s executives to do something “materially harmful” to the company. The firm downgraded its opinion of DuPont’s credit to “deteriorating,” from “stable,” and it said that it believes the much larger credit rating firm Moody’s is likely to downgrade DuPont as well.

Gimmie Credit’s director of research Carol Levenson made clear that her firm’s downgrade of DuPont’s debt was not about the company itself or how it was doing; it’s about the “meaningful harm” that Peltz’s plan could do to DuPont.

“Mr. Peltz’s spinoff plan as I understand it would leave the remaining company … with more expensive financing costs, poorer access to the debt and commercial paper markets, and little cushion for the next and inevitable downturn,” Levenson wrote in an e-mail response to questions about the report.

So far, DuPont’s management has largely resisted Peltz’s proposals, which include splitting up the company and dramatically cutting costs. Last month, Peltz’s fund launched a proxy fight to elect four of its own candidates, including Peltz, to DuPont’s board. But Levenson says there are signs that DuPont may be caving to Peltz’s demands, or at least that it is being forced to make moves that may not be good for the company in order to appease the activist investors and other shareholders who might side with him.

Levenson said DuPont’s announcement that it was distributing all of the cash it will get from an upcoming spin-off to shareholders, rather than use it to pay down debt or to invest in DuPont’s business, is an ominous sign. And last week, DuPont stepped up its cost cutting efforts, which was largely interpreted as a response to Peltz’s demands. Also, according to a Reuters report on Wednesday, DuPont (DD) interviewed Peltz’s nominees, which could be a sign the company is considering allowing some of Peltz’s allies on its board.

Both DuPont and Trian did not respond to requests for comment.

Of course, what is good for lenders may not always be what’s best for investors. Corporate executives are regularly advised to add debt to boost their return on equity, a metric that is often watched by shareholders. And Gimmie Credit’s report is more focused on what Peltz’s plans means for bondholders. Trian has said that DuPont’s shares would be worth nearly double what they are if the company were to split up, though its not clear that Trian’s math adds up.

So it is possible that Peltz’s plan could both make DuPont a riskier borrower and boost its shares at the same time.

However, Gimmie Credit’s Levenson says she thinks Peltz’s plan is bad all around. She says DuPont benefits from its size, diversity of businesses, and relatively low debt. She argues that Peltz’s plan would add an enormous amount of debt, and create a company that is smaller, and far riskier than DuPont is today.

“I think DuPont’s traditional financial conservatism has done well by its shareholders as well as its bondholders and see no compelling reason for it to change radically those financial policies,” says Levenson.