Private equity back to selling junk debt to pay dividends

NEW YORK: Private equity firms are using some of their companies as automated teller machines again.

The firms are piling more debt onto companies they own to fund payouts to themselves, a telltale sign that investors are increasingly willing to take risks. So far this year in the United States, there have been eight leveraged loan sales whose proceeds went in part to the companies’ owners, mainly private equity firms, according to data compiled by Bloomberg.

That compares with two for the entire fourth quarter of 2022.

In Europe, companies have raised US$2bil (RM9bil) in dividend recapitalisations, accounting for 12% of all leveraged loans sold this year, compared with just 4% for all of 2022.

Investors are willing to buy this debt in part because there have been so few loans sold in recent months as new acquisition activity has been depressed.

The economy also seems stronger than money managers expected a few months ago, said Michael Chang, senior portfolio manager at Vanguard Group Inc.

“That’s a backdrop that, in general, allows for incrementally more aggressive financing activity,” said Chang. “We have yet to see that play out in terms of leveraged buyout activity, but that usually takes a little bit longer.”

In February in the US market, five issuers have come forward with deals that include dividends for sponsors, including specialty chemicals company Nouryon Holding B.V. and insurance broker AmWINS Group Inc.

US leveraged loans have gained 3.3% this year, according to the Morningstar LSTA US Leveraged Loan Total Return Index.

For much of the last year, markets have been growing more concerned about rising interest expenses and pressure on earnings as central banks hike rates to tame inflation. Publicly traded companies are preparing for tough times ahead by taking steps, including cutting dividends.

So far this year, as many as 17 public companies in the Dow Jones US Total Stock Market Index have cut their payouts, and others may have to follow. — Bloomberg