Bain Taps Lenders for Dividend as Loans Offer IPO Alternative

Bain Capital LLC is leading private-equity firms in capitalizing on investor demand for leveraged loans in the U.S. to extract payouts from companies they own.

Styron, taken private by Bain for $1.63 billion in June, is raising a $1.3 billion term loan to refinance debt and pay back a portion of the Boston-based firm’s investment in the maker of polystyrene and latex. TowerCo LLC is marketing $390 million of loans with $150 million slated for a payout to its backers, such as Microsoft Corp. co-founder Paul Allen’s investment firm.

Providence Equity Partners LLC and Thoma Bravo LLC are also among firms that are using leveraged loans this year to take out some of the cash they used to buy companies and generate returns for their investors after initial public offerings backed by buyout shops performed worse than all other public listings in 2010. Lenders buying riskier assets to get higher returns are pouring record amounts of money into loan retail funds as the U.S. economy shows signs that the recovery is gaining momentum.

“In a historical context, the loan market and dividend deals are probably a more friendly option to issuers than the equity market,” said Chris Turner, managing director in the financial sponsors group in New York at Barclays Capital, the investment banking division of Barclays Plc. “From mid-2007 to the end of last year, there was very little return to limited partners. As a consequence, there is greater pressure on private-equity firms to return capital to investors.”

Private-equity firms, which pool money from investors and obtain debt to finance takeovers with the intention of selling the companies later for a profit, raised $6.6 billion in 31 IPOs that accounted for 15 percent of sales in the U.S. last year, according to data compiled by Bloomberg. The shares gained 3.8 percent on average in the first month of trading, less than half the 8.1 percent advance for all other initial offerings.

Dividend Loan Issuance

Speculative-grade companies are raising $2.82 billion of high-yield, high-risk loans to help fund payouts to their owners and refinance debt, making up 18 percent of total issuance this year, according to Standard & Poor’s Leveraged Commentary and Data. The loans are rated below Baa3 by Moody’s Investors Service and BBB- by S&P.

Investors added $941 million to retail loan funds this week, bringing contributions in January to $2.46 billion following a record $3.1 billion in December, Deutsche Bank AG said, citing Lipper FMI. Leveraged loans, which pay interest tied to benchmarks such as the London interbank offered rate, provide a hedge against a rise in interest rates linked to U.S. Treasuries.

Yields on 10-year Treasuries rose to 3.45 percent as of yesterday from 3.32 percent last week, Bloomberg data show. They’ve been rising for five consecutive months.

Historically ‘Wide’ Spreads

Lenders are also demanding more yield to fund loans. Pricing for debt rated B+ or B rose to 6.44 percentage points as of yesterday from 6.39 percentage points in December, S&P LCD said. The average all-in spread -- which assumes three-year maturity on loans and includes upfront fees, original-issue discounts and Libor floors -- was at a record low of 2.14 percent in February 2007 as the buyout boom was peaking.

“Historically spreads are very wide, there’s a Libor-based floating rate component and the economy is recovering,” said Thomas McDonnell, portfolio manager at Babson Capital Management LLC, which manages $132.5 billion, including loans. “All of those factors lead investors to say leveraged loans are a very attractive space.”

The economic outlook for the next three to six months rose 1 percent, New York-based Conference Board said yesterday, as the National Association of Realtors reported that purchases of existing houses jumped 12 percent in December to a 5.28 million annual rate, the most since May.

Fed Stimulus

Unemployment benefits claims fell by 37,000 last week, the most since February 2010, to 404,000, according to the Labor Department. Philadelphia-area manufacturing expanded for a fourth month as orders grew the most since September 2004 and employment picked up.

Federal Reserve officials are likely to press ahead with their plan to pump more cash into the economy in their second round of monetary stimulus, buying $600 billion of Treasuries through June in an effort to boost the growth rate and reduce unemployment.

“On the macro level demand for risky assets is strong,” said Jonathan Blau, head of global leveraged finance strategy at Credit Suisse Group AG in New York. “The ultimate driver here is liquidity in the financial system overall as supplied by the central bank.”

Styron Dividend

Styron, the former Dow Chemical Co. unit, plans to cut overall debt costs and pay a dividend of about $370 million to Bain. The private-equity firm invested $643 million in the LBO and Berwyn, Pennsylvania-based Styron got an $800 million term loan, a $240 million revolving credit line and $75 million of payment-in-kind notes held by Dow to help pay for the acquisition.

Deutsche Bank, HSBC Holdings Plc, Barclays and Bank of Montreal held a lender meeting to discuss terms for the new loan yesterday and investors have until Feb. 1 to respond.

TowerCo, the Cary, North Carolina-based telecommunications company, initiated lender talks yesterday via Morgan Stanley, Fifth Third Bancorp and Toronto-Dominion Bank.

NexTag Inc., the comparison-shopping website, is expected to complete next week issuing a $150 million term loan, all of which may be used for a payout to owner Providence Equity Partners.

Flexera Software Inc., owned by Thoma Bravo, raised a $200 million term loan which jumped as much as 2.5 cents to 100.5 cents on the dollar when it started trading this week.

“The loan market feels very strong. The depth has come back, and the funding costs are very attractive,” Barclays’ Turner said. “Markets aren’t always open for dividend transactions so when they are, it’s a compelling option for companies that can handle the incremental leverage.”

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