Wall Street Borrows More for Payouts as IPOs Fall, Moody’s Says
Private-equity firms took most of the $11 billion in dividends that U.S. speculative-grade companies paid in the first six months of the year as Wall Street’s ability to exit investments through initial public offerings plummeted.
Buyout firms owned 28 of the 35 high-yield, high-risk borrowers that made such payments through debt transactions, according to a report published yesterday by Moody’s Investors Service. The two largest deals were a $2.2 billion dividend to Bain Capital LLC and Thomas H. Lee Partners LP from billboard firm Clear Channel Communications Inc. (CCO) and a $1 billion payout to Bain and KKR & Co. from hospital operator HCA Holdings Inc. (HCA)
“Dividends are one of the exit strategies that private- equity firms use and in the early part of the year dividend recaps were prevalent,” Lenny Ajzenman, an analyst at Moody’s in New York and an author of the report, said yesterday in a telephone interview.
Leverage, or debt to earnings before interest, taxes, depreciation and amortization, rose in companies taking dividends that were purchased by private-equity firms between 2008 and 2011, according to Moody’s. About 54 percent of companies paying dividends had leverage between 4 times and 6 times.
Investor receptiveness to deals backing payouts “depends on the track record and market position of the issuer,” Ajzenman said. “Leverage in many of the deals didn’t get up to the bubble era level.”
IPOs fell 34 percent during the last quarter with investors rattled by uncertain economic conditions. Companies globally raised $41.3 billion by selling shares, the worst quarter since 2009 and down from $62.7 billion a year ago, according to data compiled by Bloomberg.
Borrowings for payouts were fueled by credit markets that were receptive between February and April, before cooling down in June to such deals, according to the report. The majority of the dividends for companies owned by buyout firms were financed with loans, Moody’s said.
The Standard & Poor’s/LSTA U.S. Leveraged Loan 100 index rose to a year high of 94.56 cents on the dollar on May 14, before falling to 91.8 cents on June 5. The measure, which tracks the 100 largest dollar-denominated first-lien leveraged loans, closed at 93.98 cents yesterday.
Leveraged loans and high-yield bonds are rated below Baa3 by Moody’s and lower than BBB- by S&P.
The effect of debt-financed dividends on ratings was minimal, with only four companies among 35 receiving downgrades due to payouts, according the report. More than half of the borrowers seeking payments were rated B2, five levels below investment grade.
“We’ll probably see pockets of activity through the year where private-equity firms try to extract more dividends,” Ajzenman said.
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