* Bain more active than others in dividend recapitalization loans
* Rush to do deals ahead of potential rise in dividend tax rate
By Lynnley Browning and Nanette Byrnes
Dec 6 Bain Capital has been leading private equity firms in
using a controversial financing strategy to generate low-tax special dividends
for itself and its investors for nearly the last decade.
A Reuters analysis shows Boston-based Bain had done more "dividend
recapitalization" loans from 2003 through last June than TPG Capital LP
, Blackstone Group LP and other rival private equity firms.
Private equity firms, sometimes in consortiums with competitors, typically
buy large stakes in established corporations with the goal of improving their
performance and reselling them later at a profit.
Dividend recapitalization, which is legal, is a shortcut through this
process. Instead of waiting to take profits when an acquisition is resold, the
private equity firm arranges for the company to borrow money, either through a
bank loan or a bond issue, often of speculative grade. The private equity firm
then channels the proceeds to itself and its investors through a dividend.
Private equity firms also use this strategy to generate profits from
companies they have already taken public, but which have not found a buyer or
whose stock price is lagging.
Dividend recapitalization loans allow the private equity firm to extract
some money from its investment while maintaining its control of it.
"It's a way to put some cash in your pocket but still have control of a
company when it is attractive to buyers at a later point," said Joseph Doloboff,
a partner with the law firm of Blank Rome who has been involved in some dividend
deals, but none for Bain Capital.
ADDING TO COMPANY'S DEBT LOAD
Some have criticized the dividend recap strategy for saddling companies with
debt and for the 15 percent U.S. tax treatment often applied to the payouts,
which is far below the 35 percent top individual income tax rate.
"It seems like taxpayers are participants to the deals," said Chuck Marr,
director of federal tax policy at the left-leaning think tank Center on Budget
and Policy Priorities.
If Congress does not intervene, the 15 percent tax treatment of qualified
dividends will end in January. Anticipation of a possible increase in the
dividend tax has boosted dividend recap activity.
Bank-loan financed dividend recaps paid out a record $34.1 billion to
private equity firms in the first nine months of this year, well above $25.5
billion for all of 2011, according to financial data tracker S&P Capital IQ.
Over the nearly 10-year period analyzed by Reuters, Bain helped arrange, or
was one of the firms involved in, at least 12 bank-loan financed payouts worth
nearly $11.9 billion. The deals included such household names as Dunkin' Brands
Group Inc and Domino's Pizza Inc, according to Thomson Reuters
Reuters could not determine if or by how much Mitt Romney, the unsuccessful
Republican presidential candidate who co-founded Bain Capital, benefited from
the firm's use of the dividend recapitalization strategy. Romney, who headed
Bain Capital from 1984 to 1999, owns stakes in many of its funds.
A spokeswoman for Romney during the 2012 political campaign referred
questions to Bain Capital spokeswoman Charlyn Lusk, who declined to comment for
HOW RIVALS SCORED
Compared with Bain, other private equity firms were involved in fewer
dividend recapitalization deals during the period Reuters analyzed.
Here are the number and total value of deals involving Bain and some of its
rivals from 2003 through June 2012, according to LPC.
Private equity firm Number of deals Total value of deals
Bain Capital 12 $11.89 billion
TPG 6 $7.15 billion
Blackstone 6 $4.56 billion
Thomas H. Lee Partners 3 $3.82 billion
Apollo Investment Corp 8 $3.76 billion
KKR & Co LP 6 $3.33 billion
The LPC data excludes payouts financed by bonds instead of bank loans. While
bond-financed payouts surged in 2010 and 2011, they have historically been about
a third or less of total payout volume, according to S&P Capital IQ.
KKR, Apollo and TPG declined to comment; Blackstone and
Thomas H. Lee did not respond to requests for comment.
Some dividend recap payouts are not considered qualified dividends but
nontaxable returns of capital to investors. It is not known how many payouts by
companies owned or controlled by Bain or other private equity firms have
qualified for the zero-percent tax treatment.