Dividend Debt Deals May Put European Companies at Risk, S&P Says

A surge in junk-rated European companies taking out debt to pay their private-equity owners a dividend may lead to an increase in borrowers’ risks, according to Standard & Poor’s.

Debt-funded dividends totaled 2.3 billion euros ($3 billion) this year compared with 1.87 billion euros for all of 2012, S&P analysts including Taron Wade wrote in a report today. European companies raising money to pay shareholders include WorldPay Ltd., Oxea and DFS Furniture Holdings Plc, according to data compiled by Bloomberg.

“Risks may rise as more highly leveraged companies lower down the credit curve opt for such payments,” the analysts said in the report. “Principal among these risks is a more aggressive financial policy from shareholders.”

Dividend deals are increasing because of favorable debt issuance conditions and difficulties selling businesses or raising money through share sales, they said. Mergers and acquisitions of Western European companies totaled about $273 billion this year compared with $374 billion during the same period in 2012, Bloomberg data show.

More dividend deals have been sought by BB rated companies than lower-grade businesses, S&P said. The number of weaker borrowers raising funds for a shareholder payout has increased and the percentage of B rated borrowers doing such deals doubled this year, it said.

Private-equity companies may also have less incentive to invest in the businesses they own if they have already taken cash out of the companies, S&P said.

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