By Joy Ferguson
NEW YORK, Feb 27 (IFR) - M&A and leveraged buyouts are set
to increase but new debt issues to fund dividend payments, known
as "dividend recaps", are likely to slow down in 2013, according
to a new Moody's report.
Dividend recap activity flourished at the end of 2012 as
private equity firms rushed in to beat anticipated increases to
federal tax rates.
At least 52 debt-financed dividend recaps worth nearly
US$15bn were recorded in the fourth quarter among rated US
non-financial corporate deals - triple the average pace of the
first three quarters of 2012.
Of that fourth quarter amount, Moody's found that nearly
two-thirds of the recaps were financed through the leveraged
loan market, which may reflect limited prepayment penalties as
compared to bond transactions. Another roughly 20% came from
pay-in-kind notes, followed by 17% from other secured or
unsecured notes in the bond market.
The report said that recap transactions became more
aggressive over the course of the year. Among the fourth-quarter
recap deals, 50% had pro forma leverage of 6x or higher,
compared with more than 40% in the third quarter and about 25%
in the first half of 2012. About 22% of the transactions in the
last quarter were leveraged seven times or higher, compared with
7% in the third quarter and 11% in the first half.
Even so, Moody's said it did not expect the busy recap pace
to continue in 2013.
"With the tax issue resolved, we have already seen a
slowdown in dividend recap volumes in the early part of 2013,
suggesting that many transactions were pulled into 2012," said
Lenny Ajzenman, lead analyst of the report.
The fiscal cliff compromise reached on January 1 raised the
dividend tax rate for high earners to 23.8% from 15%, including
a 3.8% increase associated with the Affordable Care Act that
passed in 2010.
STILL OPEN TO RISK
Moody's said that while dividend recaps are expected to slow
form the high volumes at the end of 2012, this does not signal
that investors are unwilling to accept more risk for higher
"Over the near term, we think that yield-hungry investors
will continue to accept aggressive structures, leverage above
six times, PIK notes and covenant-lite packages as a consequence
of today's low interest rates and moderating downside risks to
the economy," said Ajzenman.
"However, an increase in investor perceptions of economic or
interest-rate risks could lead to risk aversion and a demand for
more conservative structures."
Since the start of the year, four PIK toggle issues have
priced in the high-yield market from Nord Anglia Education
AEUH.UL], Burlington Holdings, Neovia Logistics Intermediate
Holdings and Orion Engineered Carbons Finance.
Overall, most activity in the bond and loan markets this
year has come from refinancing and repricings. However, recent
M&A and LBO announcements, such as from Dell, seem to "presage
that larger-scale LBOs will be achievable in 2013," said
"We expect deal activity to get a boost in 2013 given strong
cash balances at many companies, sponsors with significant
untapped equity commitments, a benign default rate forecast,
favorable credit market conditions and signs of moderating
economic risk," he said.
Earlier this month, Dell released details on its
financing plans for its US$24.4bn buyout. The debt financing is
expected to consist of a US$4bn senior secured term loan B
facility, a US$1.5bn senior secured term loan C facility, a
US$2bn ABL facility, and US$3.25bn of bonds, comprising US$2bn
first lien notes and US$1.25bn second lien notes.
Credit Suisse is left lead on the notes offerings, while
BofA Merrill is lead arranger on the loans. The deal will also
include a US$1.9bn term commercial receivables financing
facility and a US$1.1bn revolving consumer receivables financing
New M&A supply will also come from Heinz through its
US$28bn acquisition by Berkshire Hathaway and 3G and
from Constellation Brands.
For the Heinz deal, JP Morgan and Wells Fargo have committed
to provide US$14.1bn of new debt financing, consisting of
US$8.5bn of US dollar senior secured term loan B-1 and B-2
facilities, USD$2bn of euro/sterling senior secured term loan
B-1 and B-2 facilities, a US$1.5bn senior secured revolver and a
US$2.1bn second lien bridge loan.
Constellation Brands on Tuesday provided more
details of its Crown Imports and Piedras brewery acquisition
financing. BofA Merrill, JP Morgan, Rabobank, Barclays, Wells
Fargo, Mitsubishi UFJ Securities and HSBC will provide US$1.85bn
term loan A bridge loan and a US$2.525bn bridge loan B to
backstop the deal.
The bridge loan A will be reduced by any senior notes sold,
and the bridge loan B will be reduced by any new term loans
incurred, or by draws on its revolver, A/R credit facility or
cash on hand.
Constellation is acquiring the 50% of Crown Imports that it
does not already own for US$1.85bn. In addition, it is acquiring
Compania Cervecera de Coahuila, Grupo Modelo's
state-of-the-art brewery and its perpetual brand licenses in the
US for US$2.9bn from Anheuser-Busch InBev.