| NEW YORK
NEW YORK Dec 7 U.S. private equity-backed
middle market issuers are seeking dividend recapitalization
loans in record numbers ahead of a widely expected post-New Year
hike in tax rates. The strength of the credit markets and unmet
investor demand for M&A and LBO deals has further intensified
the rush to ink debt-funded dividend deals while the window is
Currently, both dividend income and capital gains are taxed
at a rate of 15 percent. With the Bush era tax cuts again slated
to expire, dividend income could be taxed as ordinary income, as
it was historically. Such a change would nearly double the rate
levied on dividends for those earning above $250,000 annually.
The rate on capital gains could rise to 20 percent.
"The tax law changes are the big driver, but what makes that
type of deal more robust is the lack of new deals, good
liquidity and strong technicals," said one middle market lender.
Quarter-to-date, middle market dividend recap issuance,
including completed and in-process transactions, soared to $5.53
billion, up from just over $500 million in 3Q12, according to
Thomson Reuter LPC data.
Dividend recap volume is on target to reach an all-time high
in 4Q12, both in terms of dollar amount and as a percentage of
middle market sponsored dealflow. So far this quarter, dividend
loans represent a hefty 30 percent of sponsored issuance.
If you can get a recap done and take a dividend, sponsors
are doing it, one middle market buyside investor said. "Anybody
and everybody is trying to push through a dividend recap," he
The 4Q12 combined tally of completed and in-process deals
already surpasses the $4.36 billion recorded in 4Q10 when the
impending expiration of the Bush tax cuts precipitated a wave of
dividend loans, only to see the tax cuts extended by two years.
"The last gasp of dividend recap deals are trying to get
done," noted a second lender, who observed that some sponsors
have surfaced with dividend deals for multiple portfolio
In the last two weeks alone, at least half a dozen financial
sponsor-backed middle market borrowers have launched dividend
recap loans just in time to seal the deals before year-end in
order to monetize investments in portfolio companies. Among the
dividend deals in market, some issuers are also seeking to
reduce borrowing costs on existing debt by refinancing at lower
Hearthside Food Solutions launched a $433 million
recapitalization loan led by GE Capital to refinance debt and to
fund a dividend to financial sponsor Windpoint Partners. The
deal marks the company's second dividend this year and comes
roughly six months after it tapped investors for the previous
Citadel Plastics is in market with a $271 million
first/second-lien dividend recap loan also led by GE Capital
. The company was acquired in a leveraged buyout by
Huntsman Gay in February. The deal, which is to refinance debt
and to fund a dividend, is talk at LIB+450-475 for the
first-lien piece. The $155 million LBO loan cleared at LIB+525.
While the dividend deals have piled up, investors cite more
pushback in recent weeks with respect to increasingly aggressive
leverage levels, looser structures and downward pressure on
"Pricing is inching back up," said the first lender.
With an eye on portfolio performance, investors are picking
and choosing with more selectivity. Accounts are trying to
strike a balance between putting money to work and some
cautiousness with respect to credit quality and company
All deals get done, but at a price, noted the second lender.