High-yield dividend deals hit 10-year peak, fueled by riskier issuers

After a fallow year in 2020, high-yield issuers in 2021 are tapping the bond markets to fund shareholder distributions in the highest volumes in a decade, a trend propelled by a high proportion of bonds from debut borrowers, according to LCD.

From Jan. 1 through May 18, issuance of high-yield bonds backing distributions to shareholders — commonly referred to as dividend recapitalizations — totaled $8.17 billion. That was a significant increase from $800 million over the comparable period last year and already is nearing the $9.70 billion of issuance for dividend recaps over all last year and the $8.44 billion priced in 2019, according to LCD.

The year-to-date pace is the fastest since post-recession 2011, when issuance for the carve-out totaled $17.9 billion for a comparable period, representing the bulk of the $20.5 billion priced for this purpose over all of that year. The highest total on record for any calendar year is the $25 billion placed in 2013, per LCD data since 2005.

Investors are supporting a broad base of borrowers with ambitions for shareholder payouts. Among ratings categories, deals rated CCC or lower accounted for nearly 25% of total recapitalization-driven issuance through May 18, the highest such proportion since 2014.

Further, a higher amount of the year-to-date volume has come from debut issuers ($4.29 billion) than from seasoned borrowers ($3.88 billion). The year-to-date total for first-time issuers — an all-time high for any comparable period — includes debut prints in the second quarter from SI Group ($300 million, via issuing entities Polar US Borrower LLC and Schenectady International Group Inc.), Imperial Dade ($660 million) and LCM Investments Holdings II LLC ($700 million).

Among recent deals for seasoned borrowers, Sotheby's on May 13 placed $300 million of eight-year notes to fund a distribution to parent holding company BidFair Holdings.

While Sotheby's debt-financed distribution scheme drew a one-notch downgrade at Moody's, the pivot to higher shareholder returns is up and down the credit-ratings ladder, and it comes amid a clear positive inflection for corporate ratings as well as against improving cash flows and deep pools of liquidity in the wake of accommodative Fed policy through the pandemic.

More aggressive financial policy was already evident in the closing months of 2020 as total shareholder returns (dividends and share buybacks) across the broad S&P 500 increased 14.7% from the third quarter to the fourth quarter, according to S&P Dow Jones Indices. For reference, the $249.4 billion of dividends and buybacks for the S&P 500 over the final quarter last year was still down 19% versus the fourth quarter of 2019, and it compared with a record-high $342.8 billion in the fourth quarter of 2018, according to the index provider. For all of 2020, the $1 trillion of shareholder returns was down from more than $1.2 trillion in 2019.

Among highly seasoned issuers, Charter Communications on May 18 completed a $750 million offering of high-yield senior notes, alongside $2.8 billion of split-rated senior secured notes, in part backing the company's share-repurchase program. Notably, Charter ranked fifth on S&P Dow Jones Indices' list of companies executing the most share buybacks in the fourth quarter of 2020, trailing only Apple Inc., Berkshire Hathaway Inc., Alphabet Inc. and Microsoft Corp.

For all of 2020, Charter repurchased $11.2 billion of its shares, up from $6.9 billion in 2019. The $3.7 billion it bought back in the first quarter this year was $1.3 billion more than it paid out in the first quarter of 2020, according to S&P Global Market Intelligence.