The volume of dividend recapitalizations across the European leveraged finance markets has rocketed in 2021, with such deals totaling €18.15 billion across the high-yield bond and leveraged loan products in the year to June 11, according to LCD.
This strong volume means that in less than six months, 2021 has already hosted more dividend recap supply than all other recent full years except 2017. What's more, these recaps have returned a whopping €7.53 billion of dividends to leveraged borrowers' private equity sponsors in the year to June 18. At this pace, 2021 is on track to easily exceed the €8.15 billion returned to private equity sponsors in 2017 and even possibly the total dividends of €11.32 billion and €10.04 billion recorded at the height of the market in 2006 and 2007, respectively.
The ability to complete opportunistic recaps is one of the key indicators of an issuer-friendly market, and the surge in such deals this year illustrates just how far the European leveraged finance markets have recovered since they were first hit by the COVID-19 pandemic in 2020 as well how pricing has moved.
"You can do dividend recaps in a strong market, and at the moment, we're back at a very strong point for issuers," said one senior banker. "There are still plenty of opportunities out there, and there are more recaps to come."
Sources also note that private equity owners may be looking to recoup some of the support given to bolster companies' liquidity during the pandemic last year through dividends or via the repayment of shareholder bonds and loans. Meanwhile, other sponsors have sought to take dividends from assets that they have been left holding longer than expected, especially as soaring valuations have curtailed opportunities to exit firms via buyouts. For example, Ardian, the owner of French food retailer Prosol Gestion SA, had explored the possibility of a sale earlier this year, with an enterprise value of up to €3.2 billion mooted. While no sale emerged, Prosol is now out to market with a €1.38 billion term loan that will refinance debt, repay a portion of convertible bonds and buy back preferred shares.
One of the largest dividend recaps of the year came back in January as Hellman & Friedman-backed alarm and security systems provider Verisure Oy completed a bond and term loan debt package of roughly €4.4 billion to finance a €1.6 billion dividend.
Since then, the flow of sponsor-backed dividend deals has continued steadily. Earlier in June, Clayton Dubilier & Rice-backed Motor Fuel Group Ltd. completed term loan add-ons of €300 million and £65 million to support a recap, while in late May, Onex-owned Acacium Group Ltd., which was formerly known as Independent Clinical Services, allocated a £375 million facility to repay a shareholder loan and refinance debt.
In the high-yield bond market recently, optical product and hearing aid producer Alain Afflelou, which is backed by Lion Capital and CDPQ, allocated a €485 million offering of fixed- and floating-rate notes that was partially used to fund a €135 million dividend through a partial shareholder bond reimbursement, while Norvestor-backed residential property maintenance firm PHM Group Holding Oy priced €300 million of secured notes for general corporate purposes and to fund a dividend of up to €70 million.
Elsewhere, French home equipment retailer BUT SAS is out to market this week with a €500 million offering of secured notes that will be used alongside €203 million of cash on balance sheet to refinance debt, fund a €215 million shareholder dividend and repay an €85 million shareholder loan.
Other dividend recaps from non-sponsor-backed names are not included in the volume figures above, including the recent €900 million environmental, social and governance-linked term loan B from Virgin Media Ireland, the proceeds of which will be used for general corporate purposes and to fund a shareholder dividend.
But while the surge in dividend deals reflects an improving issuance backdrop that has seen an uptick in all types of transactions, this is not to say that investors are accepting all recaps, with their appetite for such deals remaining credit-dependent.
Earlier in June, for example, web-hosting services provider group.ONE removed the dividend element of its term loan refinancing, reducing the transaction to €350 million from €375 million. Sponsor Cinven had planned to use part of the proceeds from the deal — along with €40 million of cash from the balance sheet — to pay a €65 million dividend, though it also said that a dividend had not been an integral part of its refinancing but rather a "plug number" for the debt stack to maintain appropriate leverage. With investors reticent to fund a dividend for a relatively modest-sized firm and effectively a first-time borrower, the sponsor instead opted to leave its cash in the business to support future bolt-on acquisitions.