Loan-Funded Dividends to Buyout Firms to Slow Down, Moody’s Says
Buyout firms are poised to slow the amount of loan-funded dividends extracted from companies they own amid concern that tax-rate increases would hurt the biggest earners, according to Moody’s Investors Service.
The volume of such transactions is likely to fall from the “frenetic pace” of the fourth quarter, even as low interest rates fuel investor appetite for high-yield debt, Moody’s said yesterday in a report. The majority of loan issuance this year has been for refinancings and to reduce interest rates, Moody’s analysts led by Lenny Ajzenman in New York wrote in the report.
The budget compromise reached on New Year’s Day to avert the so-called fiscal cliff raised the dividend tax rate for high earners to 23.8 percent from 15 percent, Moody’s said in the report. There were $56.4 billion of loans in 2012 to fund dividend deals, the most ever and comprising 12.1 percent of total sales of the debt, according to Capital IQ Standard & Poor’s Leveraged Commentary & Data.
“In the fourth quarter in particular we saw a lot of tax- motivated deals driven by concern that tax rates would go up,” Ajzenman said in a telephone interview. “Now that the tax rates have gone up in connection with the fiscal cliff compromise, we still think we’ll see dividend recaps but there won’t be that sense of urgency to take out a dividend that we saw in the fourth quarter of last year.”
Investors are pouring record amounts of cash into funds that target speculative-grade bank loans as the Federal Reserve maintains its policy of keeping benchmark interest rates near zero for a fifth year. As of Feb. 22, $119.1 billion in loans have been sold this year to non-bank lenders, a third of total bank-debt sales in all of 2012, according to JPMorgan Chase & Co.
Inflows to loan funds total $7.8 billion this year, compared with $12.2 billion in all of 2012, according to the New York-based bank.
HCA Inc. (HCA)’s $2.2 billion debt-financed dividend to buyout firms Bain Capital LLC and KKR & Co. was the largest paid in the fourth quarter, followed by IMS Health Inc.’s $1.2 billion payout to owners TPG Capital and Canada Pension Plan Investment Board, according to Moody’s.
Moody’s lowered the ratings on 18 percent of the companies that used debt to fund dividends in the fourth quarter, the New York-based firm said in the report.
“Use of proceeds for debt-funded dividends or share repurchases are the most credit negative transactions from our perspective,” Ajzenman said.
Leveraged loans, a type of junk-grade debt with ratings of less than Baa3 by Moody’s and BBB- by S&P, pay coupons tied to the three-month London interbank offered rate, which today was set at 0.3 percent, the lowest since August 2011.
“Just like we saw some dividend recaps pulled into 2012, some LBOs could have been pulled into 2012 as well because there was concern capital gains tax rates would go up,” Ajzenman said.
Mergers and acquisitions this year will be driven by companies’ “significant” cash balances, large equity-capital commitments by leveraged buyout firms, a favorable default forecast, as well as positive conditions in the loan and bond markets, according to Ajzenman.
“A number of companies’ growth prospects aren’t that great because of the weak economy so M&A is a viable strategy for companies looking to grow,” he said.
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