How Trump's tweets also hit companies' credit risk

The world has seen how President Donald Trump’s tweets have the power to shame or praise a corporation for its actions. But it turns out that the Twitter blasts also affect how risky a company’s debt is.

At least for the short-term, the risk of a company defaulting on its debt rises when the president criticizes it and falls when he delivers praise. This comes from a measurement of default risk by S&P Global Market Intelligence. 

On Dec. 3, Mr. Trump as president-elect took to Twitter to castigate Rexnord (RXN), a maker of ball bearings and valves, for planning to shutter an Indianapolis factory and shift many of its 350 jobs to Mexico. The company’s default risk score surged 17.5 percent, by S&P Global Market Intelligence’s measure -- which is a mathematical model that mixes company financial fundamentals, industry statistics and macroeconomic factors. Stock prices are also part of the stew.

But a few days later, the president tweeted his appreciation of air-conditioner maker Carrier’s decision to scrap its plans to close an Indiana plant and transfer work to Mexico. The company decided instead to keep many (although not all) of the jobs in the Hoosier state. Then, the default risk score for Carrier’s parent, United Technologies (UTX), fell 17.5 percent.

A default is when a company fails to repay its debt principal or the interest on it. Rating agencies like S&P Global Ratings judge the creditworthiness of corporate bond issuers, meaning their ability to meet their debt obligations.

Jim Elder, S&P Global Market Intelligence’s director of risk services, said S&P calls the credit risk score its Probability of Default Market Signals. And since the election, it has shown that Mr. Trump’s tweets have “a short-term impact on the credit quality of individual firms that have entered his crosshairs, for better or worse.”

Indeed, it’s the post-tweet stock performance of Mr. Trump’s corporate heroes and villains that has captured the most attention. This dynamic is back in the news lately, after he tweeted that department store chain Nordstrom (JWN) had been “unfair” to his daughter Ivanka Trump for dropping her line of clothing and shoes. The company said her goods hadn’t been selling well. That may be partly owing to a nationwide boycott under way against retailers that sell brands of Trump family businesses. 

Although Nordstrom shares slid briefly after the president’s Wednesday morning tweet, they rapidly rallied, and at Thursday’s market close were up almost 7 percent, adding almost $450 million in market value, Bloomberg News estimated.

The same stock phenomenon was first seen with Rexnord: After the negative tweet, its shares fell 1 percent. But the president’s influence appears to be temporary. Since the early December tweet experience, Rexnord is up by just over 11 percent. 

S&P’s study of how the president’s Twitter activity affects credit risk adds another dimension to corporate performance, and possibly a more important one. A default is a serious matter that might lead to a bankruptcy filing, while a stock slide can be turned around by a piece of good news, like a favorable earnings release or a successful new product. 

Of course, credit risk scores are more important for a company like Rexnord, whose bonds are burdened with a junk credit rating of BB-, according to S&P Global Ratings. That rating indicates a relatively higher likelihood of nonpayment. Rexnord’s debt-to-equity ratio is 1.6, meaning it has 60 percent more debt than equity (that is, stocks). United Technologies, on the other hand, has an A- credit rating, which is upper-medium grade, and a 0.87 debt-to-equity ratio -- more equity than debt. 

So broadly speaking, Rexnord is in greater jeopardy of defaulting than United Technologies. (Since December, both companies’ credit risk scores improved, although Rexnord still is many times as risky as United Technologies.) 

According to S&P Global Market Intelligence, the risk score for Toyota Motors (TM) climbed 26.2 percent after Mr. Trump’s Jan. 5 Twitter blast threatening to hit the automaker with a special tax on Corollas built at a new plant in Mexico. And on Dec. 12, aerospace giant Lockheed Martin (LMT) got hit with a Trump tweet criticizing the price tag on the F-35 fighter plane it’s building for the U.S. Air Force -- and its risk score jumped 10.9 percent. Lockheed later reduced the price of the warplane, although it’s not clear that this is a direct result of Mr. Trump’s tweets. 

But on Jan. 9, Mr. Trump applauded Fiat Chrysler (FCAU) for planning to invest $1 billion in two existing car factories, in Ohio and Michigan. That sent the automaker’s credit risk score tumbling by 15.3 percent. 

Unfortunately for Fiat Chrysler, the U.S. Environmental Protection Agency then launched a probe into whether it had cheated on vehicle emissions tests, a fate it shares with Volkswagen (VLKAY). Fiat Chrysler’s stock dipped, only to bounce back later, thanks to a strong earnings report.

To S&P’s Elder, the “traditional fundamental drivers of the firms,” such as news that affects stock prices, “can still hold greater sway” than Mr. Trump’s tweets.

  • Larry Light

    Larry Light is a veteran financial editor and reporter who has worked for the Wall Street Journal, Forbes, Business Week, Money, AdviceIQ and Newsday.