Private Equity’s Dividend Spree Looks Like It’s Just Starting

(Bloomberg) -- It looks likely billionaires and private equity firms will keep loading up companies with debt to turn them into dividend-paying ATMs.

A surge in dividend recapitalizations -- or shareholders saddling corporations with debt to pay themselves cash -- is expected to continue into 2022 thanks to “extraordinary capacity” built into credit agreements, according to Moody’s Investors Service.

At least three borrowers are currently in the market with new leveraged loans to fund owner payouts, according to data compiled by Bloomberg.

Among them is a $1.25 billion loan backing the merger of mobile advertising companies Liftoff Mobile Inc. and Vungle Inc., orchestrated by Blackstone Inc. The private equity firm, which owns a majority stake in both companies, will pocket a special dividend from the transaction.

Global Infrastructure Partners, the investment firm founded by Adebayo Ogunlesi, is also looking to take a special payout by selling a $750 million loan backed by its equity interest in Hess Midstream, an oil and gas company active in the Bakken shale region.

“The surge of dividend recapitalizations lays bare private equity firms’ intentions to recoup their investments after paying high acquisition multiples,” analysts at Moody’s wrote in a report on Tuesday. They argued that increased investor appetite for risk and aggressive adjustments to earnings post-pandemic could help borrowers gain more flexibility.

The leveraged-loan market has recently seen some of the weakest creditor safeguards ever when it comes to dividend and debt-incurrence capacity. Moody’s said the score measuring the aggressiveness of restricted payment covenants in credit agreements stood at 4.70 in 2020. The number can range from 1 to 5, with 5 the most aggressive.

Last year’s score was only four basis points shy of the record high set in 2019.

U.S.

Expect another active day in the investment-grade primary market Wednesday after Bank of America Corp. led seven companies pricing $9.1 billion on Tuesday.

• Financial borrowers are bringing riskier deals with longer maturities to attract an investor base desperate for yield, while also capitalizing on cheap funding costs to lock in desirable long-term financing, writes Bloomberg’s Brian Smith
• In high-yield, Clearlake Capital-backed Unifrax is in line to sell $1.2 billion of bonds that fund its acquisition of Lydall
• Meanwhile, Chinese authorities have told major lenders to Evergrande not to expect interest payments due next week on bank loans
• For deal updates, click here for the New Issue Monitor
• For more, click here for the Credit Daybook Americas

Europe

The European primary market is seeing another busy session, with 18 issuers including Hungary and Banco Santander SA set to price deals for at least 16.5 billion euros equivalent across 20 tranches.

• Ten tranches come with an ESG label, including a green bond from KfW and a social note from Credit Agricole
• Hungary is offering euro notes after pricing $4.25 billion across two maturities Tuesday. The funds are to bolster its budget ahead of a potential delay in accessing European Union funds because of a feud with the bloc over democratic values

Asia

The two-day sales rush in the Asian new dollar bond market subsided a bit after weaker-than-expected U.S. inflation data for August eased some concerns that rate hikes were coming sooner rather than later.

• At least six borrowers offered U.S. currency debt on Wednesday, less than the daily volume in the previous two days, with three others mandating banks for future sales
• Uncertainties over the world’s most indebted developer China Evergrande Group continue after the nation’s monthly home sales plunged

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