By Michal Skypala
Allied Universal, a U.S. security company, successfully raised about $3.35 billion of new debt in May to acquire its UK peer G4S. Despite previous controversies surrounding G4S, prevailing bullish market sentiment smoothed the deal’s path to the finish line.
Still, some investors told Debtwire they opted out of participating in the debt before doing any analysis. These funds found it hard to overlook G4S’ tainted reputation and, for the first time, had to put Environmental, Social, and Corporate Governance (ESG) considerations over attractive credit metrics.
G4S clients are mostly in the corporate sector, but unlike Allied, it also has government contracts for running prisons and detention centers, which came under scrutiny.
In 2018, the UK government stripped G4S from running the HMP Birmingham facility after one of the largest prison riots in the country occurred under its watch. Peter Clarke, the chief inspector of prisons, said at the time that the prison was in an “appalling state.”
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“This [deal] should have died on ESG [concerns] if people are serious about it,” one buysider told Debtwire. “They manage prisons and hire low skilled [staff] on minimum wage.”
Some investors see hiring minimum wage or unskilled workers as a sign of poor governance, especially for private prisons and detention centers, which requires specially trained staff to operate. But others counter that wages alone do not necessarily constitute an ESG concern.
“Tesco has loads of people on low or minimum wage, this is a bit of a non-point,” said a CLO manager. “It is a people business so you can have incidents. What is bad is if you are involved in hiring private soldiers or ex-special forces that are violent, that is more of an ESG issue.”
G4S’ controversies are not only isolated in its private prison or detention business. In November 2019 Norway’s sovereign wealth fund banned all holdings in G4S as it “contributes to or is responsible for serious or systematic human rights violations.”
The ethical council of the world’s biggest sovereign fund found that G4S workers in Qatar and the United Arab Emirates had received lower wages than agreed and had their passports confiscated on arrival. Investigations also revealed long working days, a lack of overtime payment and cases of harassment. G4S has denied the allegations.
“[G4S] have a fair share of skeletons in the closet – a whole Wikipedia page that is bigger than the one about the business,” said a second buysider.
G4S’s past rubbed some of the buysiders the wrong way and made them question whether buying Allied Universal’s debt would expose them to a problematic company or sector. Elevated ESG concerns ended up overshadowing the attractive margin of the deal.
“We liked the G4S cash [handling] business, but we killed it quite quickly. The final decision was to not get involved,” said the second buysider.
The frenzy to invest under ESG criteria accelerated after the Covid-19 pandemic highlighted the global consequences of government and corporate actions.
Recovery stimuli from governments are now closely tied to sustainable goals and corporates are racing to set KPIs to lure conscious investors. But they mainly stay on the topic of sustainability and less on social and governance.
“It amazes me that this deal is not scrutinized more. It makes a little bit of mockery of the whole ESG push,” said a portfolio manager.
Open to interpretation
Not everyone would agree that investment in Allied Universal — and therefore G4S — is necessarily bad ESG practice, mainly because of a lack of agreement on what exactly those three letters mean.
In leveraged finance, the first attempts at defining ESG methodology came in 2019 with CLOs cutting investments in companies whose primary business activity touched on widely agreed ESG-adverse sectors like speculative oil and gas extraction, tobacco, weapons, or payday loans.
“ESG analysis back in the day was lighter on the touch. I don’t even manage sustainable funds, but we are always taking it into account in wider credit analysis, we are trying to step up,” said the portfolio manager.
Others are also getting picky and feel that just cutting out sectors is not enough.
“Generally, we get a good feedback from [our funds’] investors. They do not have a list of black-listed companies, but they want to know they can trust their manager. Are you living and breathing ESG or are you just cutting off tobacco or defense?” said the second buysider.
Therefore, some think if bad headlines arise again, Allied would not hold well against more stringent ESG criteria.
“Yes, it probably doesn’t fall into any particular ESG bucket but for us, we just felt you can put yourself in a position where litigation could come out of nowhere,” said the portfolio manager.
G4S is still facing an active lawsuit from the American Civil Liberties Union that alleges the company mistreated detainees by subjecting them to “burdensome and lengthy voyages, fully shackled with limited access to food, water, and toilets.”
“Allied Universal could be grey area, but consistency will be important,” said the second buysider. “We need more tangible metrics that are not just excluding the obvious.”
For its part, Allied Universal does not have a problematic past, so its oversight can mitigate concerns about G4S, said a second CLO manager.
During the bidding for the asset, Allied Universal already set out a plan to sell off the problematic prison arm of the company, according to a report by The Times. This gave comfort to many investors.
“We liked the deal. Saying you did not play the deal because of ESG is the most bizarre jump I have ever heard,” said the first CLO manager. “Prison needs security, it is not defense.”
Caisse de dépôt et placement du Québec (CDPQ) is the largest shareholder of Allied Universal. Allied Universal, G4S and CDPQ declined to comment.
Michal Skypala is a London-based loan reporter at Debtwire. He can be reached at firstname.lastname@example.org.