It looks likely billionaires and private equity firms will keep loading up companies with debt to turn them into dividend-paying ATMs.
A surge in dividend recapitalizations — or shareholders saddling corporations with debt to pay themselves cash — is expected to continue into 2022 thanks to “extraordinary capacity” built into credit agreements, according to Moody’s Investors Service.
At least three borrowers are currently in the market with new leveraged loans to fund owner payouts, according to data compiled by Bloomberg.
Among them is a $1.25 billion loan backing the merger of mobile advertising companies Liftoff Mobile Inc. and Vungle Inc., orchestrated by Blackstone Inc. The private equity firm, which owns a majority stake in both companies, will pocket a special dividend from the transaction.
Global Infrastructure Partners, the investment firm founded by Adebayo Ogunlesi, is also looking to take a special payout by selling a $750 million loan backed by its equity interest in Hess Midstream, an oil and gas company active in the Bakken shale region.
“The surge of dividend recapitalizations lays bare private equity firms’ intentions to recoup their investments after paying high acquisition multiples,” analysts at Moody’s wrote in a report on Tuesday. They argued that increased investor appetite for risk and aggressive adjustments to earnings post-pandemic could help borrowers gain more flexibility.
The leveraged-loan market has recently seen some of the weakest creditor safeguards ever when it comes to dividend and debt-incurrence capacity. Moody’s said the score measuring the aggressiveness of restricted payment covenants in credit agreements stood at 4.70 in 2020. The number can range from 1 to 5, with 5 the most aggressive.
Last year’s score was only four basis points shy of the record high set in 2019.