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With Investor Demand Intense, Private Equity Shops Tap Leveraged Loan Mart for Dividends

Market pros see leveraged loan default rate holding at low levels

S&P: BBB downgrade risks in Europe look manageable

As specter of rate cuts grows, investors retreat from leveraged loan asset class

Retail investors flock to US high yield bond funds with $1.8B inflow

With Investor Demand Intense, Private Equity Shops Tap Leveraged Loan Mart for Dividends

pe dividends

Private equity shops paid themselves $4.76 billion in dividends via leveraged loan recapitalizations in 2017’s third quarter, bringing the year-to-date total for this activity to $15.31 billion, nearly matching the tally for all of 2016, according to LCD.

This high-profile recap activity is a sign of the times in today’s still—overheated leveraged loan market.

Deals such as these typically proliferate when there is excess investor demand, allowing borrowers to undertake “opportunistic” issuance, such as corporate entities refinancing debt at a cheaper rate or, here, PE firms adding debt onto portfolio companies, then paying themselves an often hefty dividend with the proceeds.

This excess demand scenario has been the case over the past year or so, as institutional investors have piled into U.S. loan funds and ETFs in anticipation of rate hikes by the Fed, which typically benefit a floating-rate asset class such as leveraged loans. While these inflows to loan funds have stalled of late as the outlook for additional rate hikes has dimmed, there remains a net $14 billion of fund inflows in 2017, according to Lipper, meaning investor demand for leveraged loan paper continues intense.

Hence the relative surge in dividend deals, which are popular with private equity firms, for obvious reasons.

They can be less so with loan investors, as the PE shop’s portfolio company puts additional debt onto its balance sheet. However, institutional investors are keen to maintain strong relationships with private equity shops, which borrow frequently, so in bull credit markets these deals continue to find a home. – Tim Cross

You can read more about dividend/recap deals in LCD’s Loan Market Primer.

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LCD comps is an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.