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As M&A lags, Europe’s PE shops look to leveraged loans, high yield for dividends

The European leveraged finance markets swallowed five new dividend-related transactions totalling €2.24 billion in November, as a lull in M&A activity in the fourth quarter allowed issuers to hit the market with opportunistic transactions.

For much of the year, such dividend-related issuance has not been possible as M&A transactions dominated the primary market. “We’ve just had a six-week period with no M&A, and it’s been the first real opportunistic window we’ve seen this year,” said one market participant. “When the window is there, why would private equity turn down the chance to return money to shareholders and protect its returns?”

europe sponsored loan volume

 

But while there was a small spurt in dividend recap supply in November, the dominance of M&A activity over much of 2018 means the volume of opportunistic recaps seen so far this year has still fallen well behind some previous years.

The loan market has hosted roughly €5.87 billion of dividend activity so far this year while the bond market has taken €1.41 billion, for a total of €7.28 billion, according to LCD. While this is higher than the totals recorded in 2015 and 2016 on this measure (at €3.67 billion and €5.61 billion, respectively), it is still way behind the record-breaking volume racked up in 2017, when the market was dominated by opportunistic activity.

The dividend recaps seen so far in 2018 have resulted in some €2.64 billion being returned to shareholders via the leveraged finance market, which is well below the average of €4.5 billion for the 2006–2017 period. By contrast, in 2017 roughly €8.15 billion was returned to shareholders from the proceeds of deals in the bond and loan markets. — Nina Flitman

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Asurian Floats $3.75B Leveraged Loan Backing Dividend to Private Equity Sponsors

In one of the largest credits of its kind, a Bank of America Merrill Lynch–led arranger group has launched a $3.75 billion covenant-lite term loan package for Asurion that will be used to fund a return of capital to shareholders, according to sources. Commitments are due by noon EDT on Wed., June 27.

Dividend deals such as Asurion are seen as opportunistic issuance in the U.S. leveraged loan market, meaning issuers – or their private equity owners – take advantage of investor demand to originate credits, the proceeds of which are returned to the owners. The U.S. leveraged loan market has been red hot of late as investors crowd the floating-rate asset class thanks to ongoing and expected interest rate hikes.

The loan package includes a new $2.25 billion B-7 term loan due November 2024 and a $1.5 billion add-on to the company’s second-lien term loan due August 2025.

Price talk on the first-lien is L+300, with a 0% LIBOR floor and an OID of 99.5. That indicates a yield to maturity of about 5.55%. Lenders are offered six months of 101 soft call protection.

The second-lien guidance is L+675, with a 0% floor and an OID of 99–99.5. At talk, the yield ranges from 9.51–9.61%. Hard calls will be reset to 102 and 101.

A consent fee of 50 bps is offered to first-lien lenders and of 75 bps to second-lien lenders.

The arranger group includes Morgan Stanley, Goldman Sachs, Barclays, Credit Suisse, and Deutsche Bank.

Agencies affirmed Asurion at B+/B1, with stable outlooks, following the announcement of the share repurchase. First-lien facility ratings are B+/Ba3, with a 3 recovery rating from S&P Global Ratings. The second-lien is rated B–/B3, with a 6 recovery rating.

The issuer will also increase its revolver to $230 million and extend maturity by one year to 2023, agencies note.

Existing debt at Asurion includes its $2.6 billion TLB-4 due August 2022 and $3.2 billion TLB-6 due November 2023. Those existing term loans are priced at L+275, with a 0% floor. The original $1.8 billion second-lien term loan was placed a year ago to refinance the existing facility.

Asurion is a provider of wireless handset insurance products. The company is backed by Madison Dearborn, Berkshire Partners, Providence Equity Partners, and Welsh, Carson, Anderson & Stowe, which acquired to business in 2007, as well as other investors, including The Canadian Pension Plan Investment Board. — Jon Hemingway/ Richard Kellerhals

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Europe: As Leveraged Finance Market Rolls on, Dividend Deals Near Pre-Crisis Levels

europe dividend loans hy

Private equity shops are paying themselves dividends via junk bonds and leveraged loans in Europe at a rate not seen since before the financial crisis.

Total issuance of debt which backs dividends, all or in part, in these segments (which comprise the overall leveraged finance capital markets) has hit €18.7 billion so far in 2017, nearly matching the record €20.3 billion logged in all of 2007, according to LCD. The recent activity  more than triples the amount seen last year, while the increase funded specifically by high yield bonds is even more dramatic.

High profile activity has reflected this dynamic, with sponsors taking dividends via the bond market over the past month for portfolio companies Lowen PlayRaffinerie HeideHaya Real Estate, and Verisure, with the latter using both the loan and bond market to pay owners a €1 billion dividend (which is on course to be the largest debt-funded shareholder payment since unsponsored Ziggo paid its owners €2.8 billion through a cross-border bond financing in September last year). Demonstrating just how high risk appetite is, the Verisure financing contained a €980 million, CCC+/Caa1 tranche.

To be sure, loan and bond issuance for deals backing dividends has soared. And the amount specifically used for to fund the dividend – as opposed to another recap-related purpose – has likewise climbed, totaling €7.6 billion so far this year, more than twice the amount during all of 2016, according to LCD.

Dividend deals, of course, are more prevalent during overheated credit markets, when institutional appetite for loan or high yield paper outweighs issuance in the sector. While investors generally do not like the idea of a sponsor leveraging up a portfolio company, then extracting cash before the lending institution has been repaid, they often acquiesce, to maintain a good relationship with the sponsor – which are frequent borrowers – and because, in hot credit markets, another investor will almost certainly be willing to step in, if one should drop out. – Staff reports

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Nathan’s Famous Wraps $150M High Yield Bond to Slash Borrowing Costs

nathans logoNathan’s Famous (Nasdaq: NATH) today placed $150 million of eight-year secured notes at the tight end of talk, sources said. Jefferies was sole bookrunner for the offering. Proceeds will be used to refinance the company’s 10% secured notes due 2020, to partially fund a dividend to shareholders, and for general corporate purposes, which may include working capital. The borrower in its February 2015 market debut placed $135 million of the 2020 notes, also to back a dividend. These bonds will become callable at 105 on Nov. 15, 2017. Jericho, N.Y.–based Nathan’s Famous owns and franchises restaurants under the Nathan’s Famous brand name, and sells products bearing the Nathan’s Famous trademarks through various channels of distribution. Terms:

Issuer Nathan’s Famous
Ratings B–/B3
Amount $150 million
Issue Secured (144A/Reg S for life)
Coupon 6.625%
Price 100
Yield 6.625%
Maturity Nov. 1, 2025
Call non-call three (first call @ par+50% coupon)
Trade Oct. 18, 2017
Settle Nov. 1, 2017 (T+10)
Sole bookrunner JEFF
Price talk 6.75% area
Notes Up to 35% equity claw @ 106.625 until Nov. 1, 2020; change of control put @ 101; make-whole @ T+50

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With Investor Demand Intense, Private Equity Shops Tap Leveraged Loan Mart for Dividends

pe dividends

Private equity shops paid themselves $4.76 billion in dividends via leveraged loan recapitalizations in 2017’s third quarter, bringing the year-to-date total for this activity to $15.31 billion, nearly matching the tally for all of 2016, according to LCD.

This high-profile recap activity is a sign of the times in today’s still—overheated leveraged loan market.

Deals such as these typically proliferate when there is excess investor demand, allowing borrowers to undertake “opportunistic” issuance, such as corporate entities refinancing debt at a cheaper rate or, here, PE firms adding debt onto portfolio companies, then paying themselves an often hefty dividend with the proceeds.

This excess demand scenario has been the case over the past year or so, as institutional investors have piled into U.S. loan funds and ETFs in anticipation of rate hikes by the Fed, which typically benefit a floating-rate asset class such as leveraged loans. While these inflows to loan funds have stalled of late as the outlook for additional rate hikes has dimmed, there remains a net $14 billion of fund inflows in 2017, according to Lipper, meaning investor demand for leveraged loan paper continues intense.

Hence the relative surge in dividend deals, which are popular with private equity firms, for obvious reasons.

They can be less so with loan investors, as the PE shop’s portfolio company puts additional debt onto its balance sheet. However, institutional investors are keen to maintain strong relationships with private equity shops, which borrow frequently, so in bull credit markets these deals continue to find a home. – Tim Cross

You can read more about dividend/recap deals in LCD’s Loan Market Primer.

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A Wireless Preps $50M Leveraged Loan Backing Dividend to Lone Star

A Wireless is the latest leveraged loan issuer to raise debt backing a dividend for its private equity sponsor.

UBS will hold a lender call at 3 p.m. EDT on Wednesday to launch a $50 million incremental B term loan for A Wireless, according to sources.

The company was last in the loan market in April with a $575 million, six-year TLB that backed a dividend recapitalization. Pricing came at L+600 with a 1% LIBOR floor, and the loan is governed by a total leverage covenant. Amortization is set at 2.5% for the first three years and 5% thereafter.

Existing facility ratings are B/Ba3, with a 3 recovery rating from S&P Global Ratings. Corporate ratings are B/B1, with stable and positive outlooks. The borrower is LSF9 Atlantis Holdings LLC.

Dividend deals have returned to the U.S. leveraged loan market of late, as borrowers take advantage of renewed supply-shortage of paper in which to invest. There were nearly $3 billion in loans backing dividends in July – up from $2 billion in June. And already in August, typically a sleepy month for the U.S. credit markets, there is some $1.4 billion in dividend deals, according to LCD.

Greenville, N.C.–based A Wireless operates as a retailer of Verizon Wireless products and services. Lone Star is the sponsor. — Jon Hemingway

You can read more about how dividend loans work in LCD’s online Loan Market Primer.

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Amid Investor Demand, Private Equity Shops Tap Loan, High Yield Bond Markets for Dividends

european dividend volume

Private equity shops have been taking advantage of investor demand in the European leveraged finance space to pay themselves some hefty dividends in 2017.

So far this year, PE firms have recouped €4.2 billion of cash via the European leveraged loan market and €1.3 billion via the European high yield bond market via dividend deals, according to LCD. At €5.5 billion total, this is already higher than all post-crisis full-year figures, other than the €6.1 billion in 2013. During all of 2016, sponsors took out roughly €3.4 billion via the leveraged finance market (€2.8 billion via loans, and €655 million via bonds).

Dividend/recaps is one form of opportunistic issuance that blossoms when the leveraged finance market is especially hot (i.e., when institutional investors are flush with cash, and eager to put that money to work). Consequently, private equity shops can lever-up portfolio companies with the newly incurred debt, paying themselves often hefty dividends in the process.

You can read more about dividend/recaps in LCD’s online Loan Primer/Almanac (it’s free).

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Europe: Private Equity Shops Line Up for Recap/Dividend Debt

The level of cash extracted via dividend recaps in the European leveraged finance market is up almost three times in the first half of 2017 compared to the same period last year — and this fast pace appears to be quickening further as the second half begins. July has opened with a flurry of dividend recap activity, as six of the seven deals with bank meetings announced since the beginning of the month are to fund recaps.

There has been an expectation this type of volume would accelerate in 2017, with liquidity so strong in both the loan and bond market that sponsors would opportunistically take out dividends instead of exiting investments. Indeed, according to private equity data from S&P Global Market Intelligence, EMEA private equity portfolio company exits are down on a count basis to 505 exits as of May 29, from 657 in the same period in 2017.

One of the reasons there was an expectation recaps would rise in 2017 is that overall leverage levels have stayed so low in Europe. Total average leverage has remained at 5.1x for 2017 so far for sponsored deals, and has hovered close to 5x every year since 2014.

You can read more about how dividend loans work in LCD’s Loan Market Primer/Almanac.- Taron Wade

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Leveraged loans: As demand for paper rolls on, private equity firms reap dividends

dividends leveraged loans

Private equity firms, never one to pass up an opportunity maximize their return on investment, have used the red-hot U.S. leveraged loan market to pay themselves a hefty $3.6 in dividends so far this year, according to LCD, an offering of S&P Global Market Intelligence.

This opportunistic loan issuance comes as investor cash continues to pour into the U.S. floating rate asset, amid a recent rate hike by the Fed, and the specter of two or three more in 2017, sources say. That crush of cash has led to a decidedly issuers’ market over the past two-plus quarters, enable soaring volume in the twin pillars of opportunistic loan issuance, repricings and dividend deals. – Staff reports

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Private Equity Shops Tap Leveraged Loans for Hefty Dividends, Amid Cash Surge

dividend loan volume

Private equity shops are taking full advantage of investor cash pouring into the U.S. leveraged loan market. Since the middle of January, sponsors had unveiled at least six transactions for a total institutional volume of nearly $7 billion, according to LCD, a unit of S&P Global Market Intelligence. At an average transaction size of better than $1 billion, these are not small deals.

That’s a decent clip for this category, by recent standards. The only month in 2016 that saw more of this type of issuance was October ($12.45 billion).

Cash has been flowing into U.S. loan funds and ETFs over the past several months as investors anticipated rate hikes by the Fed (the floating-rate leveraged loan asset class, of course, tends to attract cash in a rising rate environment). — Jon Hemingway

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This story first appeared on www.lcdcomps.com, an offering of S&P Global Market Intelligence. LCD’s subscription site offers complete news, analysis and data covering the global leveraged loan and high yield bond markets. You can learn more about LCD here.