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

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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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