Dividend loan activity picked up in September where it left off in August, with $2.4 billion of these credits launched to market so far this month (through Sept. 20), including $2.3 billion of institutional debt, according to LCD, an offering of S&P Global Market Intelligence.
While September volume trails the $4.9 billion ($4.1 billion institutional) recorded in all of August, a large chunk of last month’s activity comes via one deal, the jumbo $2.2 billion term loan for Harbor Freight Tools. By number of transactions, the two months are virtually on par—seven deals in August versus six in the first three weeks of September.
To put September’s figure in perspective, the average dividend-related loan volume for the last 12 months is $2.2 billion, and last September saw just $700 million of supply, all of it pro rata.
Note that the data reflect loans whose sole purpose is to recapitalize the company, and excludes M&A transactions, such as the mid-September add-on for Avantor Performance Materials. The manufacturer of high-performance chemistries and materials issued a $665 million incremental B term loan to fund the merger with NuSil Technology, repaying existing NuSil debt and funding a dividend in the process.
For the quarter to date, $9.3 billion of loans funded a dividend, down from $14 billion in 2Q16 and $12.8 billion in 3Q15.
The recent rush of dividend deals comes after a relatively dry month of July regarding opportunistic loan issuance, as the market recovered from the volatility that followed the Brexit vote. Aside from the $70 million add-on for Plaskolite mid-July, no other dividend-related loans launched until the last few days of the month.
Incorporating the high yield market, total leveraged finance issuance funding dividends was $13.2 billion in the quarter to Sept. 20, including $3.9 billion of bonds. While dividend loan issuance fell by 34% from the second quarter, high-yield bond issuance backing these deals rose by 25%, to a two-year high, on the back of two large Yankee borrowers, Ardagh Packaging and Ziggo.
Turning back to just loans, smaller borrowers have been tapping the market to extract dividends at a higher rate in the third quarter. Of the $9.3 billion raised to fund dividends, $1.6 billion, or 17%, came from deals sized at $350 million or less, up from just $870 million/6% in the second quarter. In fact, this is the highest volume of dividend recap loans for this size bucket since the third quarter of 2014. Recent examples include OrthoLite ($200 million), Mediware Information Systems ($300 million), and Floor & Décor (also $300 million).
Of course, sponsors drive the dividend deal market. Private-equity backed borrowers accounted for roughly 70% of overall dividend-related loan volume in the quarter to Sept. 20, on par with the prior quarter and down from 85% in last year’s dividend peak. In absolute terms, sponsored dividend loan volume fell to $6.4 billion, from $10.3 billion in the second quarter.
Not all of the money raised will go to the private equity owners, however, as most of these transactions also refinance existing debt. Looking at just the amount paid to sponsors, the leveraged loan market has financed $1.7 billion of dividends so far in the third quarter, down from $5.4 billion in the second quarter, which included a large payout for CHG Healthcare and dividend transaction for Avantor that wrapped in June, preceding the M&A loan that launched this month. These two deals alone returned over $1 billion to the sponsors. In contrast, the third quarter has seen a higher concentration of middle market deals, resulting in a lower total payout amount.
For the year to date, private equity funds extracted $7.1 billion of dividends via the loan market, down 31% from this time in 2015.
On deals for which LCD tracked the original LBO, sponsors extracted 78% of their original capital contribution, on average, via a 2016 recap, up slightly from 74% in 2015. However, the average time between the initial buyout and recap extended to 3.5 years, almost a year longer than in 2015, though there is a great distribution within the 2016 sample. Harbortouch, for instance, returned to market three months after its initial buyout while LANDesk Software has a much longer history with its sponsor, having been acquired six years ago. The latter had deleveraged since its last trip to market in 2014 (also a recap transaction), and has bolstered EBITDA through growth and acquisition activity, according to LCD.
In terms of leverage, this year’s crop of sponsored dividend transactions was on par with 2015 and 2014, with an average pro forma debt/EBITDA ratio of 5.1x. While this is more aggressive than the low 4x area seen in 2010 through 2012, it is still considerably shy of the record high of 5.4x set in 2007. – Marina Lukatsky