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U.S. Dividend-Related Leveraged Loans Hit Lofty Levels in 2017

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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


U.S. Dividend-Related Leveraged Loans Hit Lofty Levels in 2017

The sprint toward year-end by opportunistic issuers has brought 2017 dividend-related loan volume to lofty levels.

With a week or so remaining in the loan market year, institutional issuance backing dividends to private equity sponsors in 2017 totals $42.4 billion, the third-highest amount ever, behind the $51 billion in 2013 and $42.8 billion in 2014, according to LCD.

The impressive YTD number was boosted by a hectic November, in which nearly $8 billion of institutional loans backed dividends to sponsored borrowers, the highest monthly figure since the $9.2 billion in January.

If soaring monthly issuance in a high-profile loan sector bookending 2017 sounds familiar, there’s a reason: Another opportunistic segment—repricings— followed a similar track this year, with record volume in January and prodigious activity in November.

These numbers detail total loan volume backing dividends. As for how much sponsors actually paid themselves through these transactions, this activity also has picked up of late. PE shops have extracted more than $5 billion in the fourth quarter (through Dec. 8), the most since the first quarter ($6.35 billion). All told, private equity shops have used dividend loans to write themselves checks totaling $18.2 billion this year.

Those checks made for an average return on equity of 76% via recaps completed in 2017, with the average time between the LBO and recap narrowing to 3.3 years. (Note: for this analysis, return on equity is calculated by dividing the dividend amount by the original equity contribution at the time of LBO.)

Both figures are down from 2016, when recaps were undertaken an average of 3.7 years after the LBO, bringing return on equity via those transactions to 84%.

On a related note: Sponsored dividend activity in the U.S. high-yield bond market in 2017 ($4.2 billion) was roughly double that in 2016 ($2.2 billion). And, as with loans, most of that volume came late this year. Roughly $3 billion in high-yield dividend deals have been priced so far in the fourth quarter, all of it in November and December. — Tim Cross/Marina Lukatsky

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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.