High-yield market really paying dividends

Thu Dec 6, 2012 4:04pm EST

Dec 6 (IFR) - Healthcare operator HCA took advantage of a welcoming high-yield bond market this week to finance another special dividend to shareholders - its third dividend since going public last year.

The company is hardly alone in looking to provide dividend payouts ahead of potential tax hikes in 2013. At the moment, dividends are taxed at 15%, but this rate could return to upwards of 35% if the breaks are not extended next year.

"With tax rates on dividends set to double for many earners in 2013, several companies are trying to get special dividends in under the wire," Erin Lyons, Citigroup credit strategist, said in a report.

Among publicly traded high-yield companies, special dividends are more likely to come from high-quality credits with large controlling shareholders.

HCA's largest shareholders are Bain Capital and KKR, part of the group that bought the company in 2006 and took it public five years later. Combined with HCA management, they own roughly 60% of total shares.

This will be HCA's third special dividend payment since going public, with a cumulative total of nearly US$3.2m paid out.

Bond investors don't mind the use of proceeds for HCA. The company runs a very conservative balance sheet, has done a good job at delevering, and is a leader in its industry, all factors which allow it easy entry into the market.

In fact, the US$1bn 8.25-year bullet senior unsecured bond offering, rated B3/B-, apparently could have been increased substantially on the back of a very strong order book, but the company preferred not to do so.

Citigroup, BofA Merrill, Barclays, Credit Suisse, Deutsche Bank, JP Morgan, Morgan Stanley, SunTrust Robinson Humphrey and Wells Fargo led the deal, which priced at 6.25% at par, on the tight end of its 6.375% area guidance.

PIK YOUR SPOTS

Further down the credit spectrum, PIK toggle dividend issuance returned this week after taking a break in November. New Academy Finance, the parent of sporting goods retailer Academy Sports, launched a US$400m five-year non-call one senior PIK toggle offering on Thursday, upsized to US$500m, through Goldman Sachs, Credit Suisse and KKR joint books.

PIK toggle dividend issuance was significant in late September and October, when a host of private companies, including Petco, Jo-Ann Stores, BWAY Parent, Emergency Medical Services and PPDI, priced these riskier deals before the market came under pressure.

PIK toggle bonds, which allow a company to pay interest with more debt in certain situations, had not been seen in any significant amount since before the credit crisis, when they occurred frequently in LBO transactions.

Pricing on Academy's Caa1/CCC+ rated deal was expected on Thursday afternoon, with proceeds being used to fund an upsized US$500m dividend. The deal is talked at 8.00%-8.25%. KKR acquired a majority stake in the company last summer for roughly US$2.3bn, committing more than 40% of equity.

That fits with the pattern of PIK toggle issuance already seen this year. The dividend offerings that have emerged in the fourth quarter, sponsors say, were either from vintage LBOs that have delevered through the past few years and can accommodate a slight increase in debt, or LBOs from 2010 or 2011 that were financed at lower debt levels and higher equity due to a fragile macro climate at the time.

Sponsors say that for both types of deals, leverage is being brought back up to levels that a companies can bear on their balance sheets, and that these deals have been restricted to those companies that can handle them.

Elsewhere, Tops Holding is looking to pay a US$100m dividend to equity sponsor Morgan Stanley Private Equity through a US$460m five-year non-call 2.5 senior secured note.

Proceeds will also be used to repay debt. BofA Merrill and Morgan Stanley are joint books on the B3/B+ rated deal, with pricing expected on Friday. Tops Markets, a regional supermarket chain, was taken private in 2007 in a transaction valued at US$310m.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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