Bonds plug IPO, sale gap for private equity

LONDON Mon Apr 26, 2010 2:29pm EDT

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LONDON (Reuters) - Buyout houses are set to turn to Europe's red-hot high-yield bond market to pay themselves dividends by increasing debt in their companies, a controversial technique widely used before the credit crunch.

Such dividend recapitalizations provide a third option to buyout houses and other owners struggling to sell companies in weak markets for Initial Public Offerings (IPOs) and attracting only low-ball bids from trade buyers.

German packaging firm Nordenia International is mulling a possible loan and bond sale, where some or all of the proceeds will be used to pay a dividend to its owner Oaktree Capital, two banking sources told Reuters.

"I wouldn't be surprised to see three or four more transactions before the summer where there is some element of dividend payment," said one of the sources.

It was possible to raise 500 million euros ($672.1 million) in the bond market for such deals, the source said.

Dividend recaps became associated with some of the worst excesses of the leveraged buyout (LBO) boom that ended in 2007, as private equity firms saddled their companies with high levels of debt beyond what was sustainable.

If successful, Nordenia's dividend recap would be another sign of the increased importance of the European high-yield bond market which has rapidly recovered from the slump in 2007 providing much-needed capital for loan-starved indebted companies.

A sale of Nordenia to fellow buyout firm TPG for around 600 million euros fell through earlier this month, so a dividend recap would be a fillip for owner Oaktree, leaving open the option of a trade sale or an IPO at a later stage.

Deutsche Bank and Barclays are underwriting the deal, according to the sources. Both banks declined to comment.

"Nordenia is a classic type of deal. You have two well-known underwriters, a very well known sponsor who is familiar with the bond market and the sale process which has been disclosed in the market," the first source said.

RECAPS RETURN

The return of dividend recaps after a three-year hiatus could prove controversial because they erode quality even if financed via bonds instead of loans, and question the motivations of owners.

"Investors are almost trained to dislike them... but with appropriate structuring, with the right pricing for the right name, a deal can get done," said one senior banker at a U.S. investment bank.

Several weeks ago, British retailer Matalan's owner John Hargreaves had little difficulty persuading investors of his 525 million pound ($812 million) refinancing with which to pay himself a 250 million pound dividend.

The retailer boasted modest leverage, with a ratio of debt to Earnings before Interest, Tax, Depreciation and Amortization (Ebitda) of just 4.5, some way below the average of over 6 times reached during the boom.

And Italian telecoms group Wind successfully tested investor appetite in June 2009.

"You don't want a situation where a dividend deal has management spending more time on a yacht in the Mediterranean," said Peter Aspbury, head of high-yield research at European Credit Management.

Another deal from TMD Friction, a German automotive supplier owned by Pamplona Capital Management, is in the process of selling a seven-year bond, callable after three years, via a German boutique called Quirin Bank, the source said.

A spokesperson at TMD Friction declined to comment, when asked to confirm the details.

"Where you have to be careful is when private equity has taken its money out. You have to make sure they still have enough skin in the game," said Steve Logan, head of high-yield at Scottish Widows Investment Partnership (SWIP).

($1=.7439 Euro)

($1=.6465 Pound)

(Editing by Erica Billingham)

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