Dye & Durham Ltd. DND-T stock hit an all-time low Friday after S&P Global Ratings and Moody’s Ratings cut their credit ratings on the real estate software company, citing its high debt, rising costs and weak earnings in a subdued Canadian residential housing market.
Both agencies also flagged concerns about Toronto-based D&D’s continuing leadership and governance issues following consecutive costly shareholder activist campaigns.
“Governance is a key driver of the rating action, which is influenced by management turnover, ongoing shareholder activism, delayed filing of fiscal 2025 financial statements” plus an investigation by the Competition Bureau into alleged anti-competitive behaviour, Moody’s said Thursday as it cut D&D’s rating by a notch, to B3 from B2. Moody’s increased its “probability of default” rating and downgraded D&D’s liquidity rating, meaning it believes the company has adequate liquidity but depends upon external financing or possible debt relief.
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“Ongoing distractions to the board and management have limited the company’s ability” to win clients, expand earnings and reduce debt, Moody’s said. The stock closed at a record low of $6.72 on Friday, down 8.6 per cent on the day, and 70 per cent off its one-year high from last December. The company went public at $7.50 a share in July, 2020, and peaked above $50 in early 2021.
S&P cut its rating to B- from B after D&D’s debt-to-operating-earnings ratio worsened to 7.6-times in March. It blamed D&D’s lower earnings on scant revenue growth and higher costs, which included separation pay to former chief executive officer Matt Proud and proxy-related costs due to the activist campaign that led to the board’s replacement last year. S&P said that even when D&D completes a just-announced sale of a British business for $146-million and pays down debt with the proceeds, its ability to deleverage will be uncertain.
D&D enacted a poison pill Wednesday to prevent a “creeping” takeover after Mr. Proud offered to buy the company for $10.25 a share in a deal backed by his brother, ex-chairman Tyler Proud, and past director Ronnie Wahi.
Matt Proud left last December in the latter stages of a campaign led by Engine Capital LP to overhaul the board – only to then launch his own activist campaign. D&D agreed in July to appoint a nominee of Mr. Proud’s to the board and launch a strategic review. Tyler Proud and Mr. Wahi have also called for board changes.
In an interview, Matt Proud blamed the new regime for the rating cuts, noting D&D has had several CEOs and chief financial officers. “There has been a lot of mismanagement,” he said. “You’re watching earnings implode, which puts the company in a very precarious situation.
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“The company was in much better shape a year ago,” he added. “They’re not doing the blocking and tackling. They’re spending a lot and not getting return on their investment.”
But David Barr, CEO of PenderFund Capital Management, blamed the downgrades on how D&D was managed under Mr. Proud, including a debt-fuelled acquisition spree and aggressive price hikes that angered customers. He cited the real estate market slowdown, which reduced demand for D&D’s software used to process deals, and blamed its delay in filing annual financial statements on the former regime for not writing down goodwill “when it should have.”
D&D spokeswoman Amy Freedman said the company, now led by George Tsivin, “is focused on addressing a plethora of legacy issues,” product innovation and “charting a clear path to responsible deleveraging.”
D&D had faced mounting criticisms from shareholders, including PenderFund, about its management, governance and deal-making even before Engine’s campaign, which resulted in Mr. Proud’s departure and the board overhaul.
Mr. Barr said a downgrade “is never good but the new regime is doing the right things to fix the balance sheet.”