Private equity shops remained active in refinancing U.S. portfolio company debt and extracting dividends in the third quarter of 2017, though not at the pace seen earlier in the year.
However, sponsors are getting considerable bang for their buck. Total proceeds from recap loans that are used for a dividend are much higher in 2017 than in recent years, according to Leveraged Commentary & Data, or LCD. Thus far in 2017, $15.31 billion of funds raised from sponsor-backed loans were earmarked for a distribution, nearly double the $7.77 billion in the same period a year ago and well ahead of the $10.24 billion in the first three quarters of 2015.
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 additional 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 exchange-traded funds in anticipation of rate hikes by the Federal Reserve, 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 remains intense.
Hence the relative surge in dividend deals, which are popular with private equity firms. 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.
LCD is an offering of S&P Global Market Intelligence.