April 9, 2019 / 1:25 PM / 17 days ago

Private equity firms take dividends as downturn looms

LONDON, April 9 (LPC) - European private equity sponsors are increasingly looking to raise leveraged loans for dividend payouts in order to realise gains, while also locking in debt in preparation for a potential market downturn.

With volume in Europe’s leveraged loan market at its lowest level since 2009, bankers are aggressively pitching dividend recaps to sponsors in an attempt to boost deal flow.

Two dividend deals cleared the market in as many weeks - for French veterinary pharmaceuticals firm Ceva Sante Animale and Spanish hotel room specialist Hotelbeds.

Dutch textile technology group TenCate is in the market and more such deals are expected, including a large recapitalisation expected for the week after Easter.

“Dividend recaps are back,” a senior banker said.

Although it may not be the obvious time for sponsors to take equity back, given the fact they are sitting on large stockpiles of it already, many sponsors are willing to do so because of the weak economic outlook.

“Taking cash back isn’t always an obvious thing to do unless you are thinking about cycles. If you think it could be the time to take it then that overrides sitting on cash,” a syndicate head said.

The senior banker added: “Management has a big stake in Ceva and are fiercely protective of the company. The fact they took that money out, well that’s saying something.”

PAYING UP

Borrowers are even paying up for the privilege, sacrificing low interest rates for significantly higher debt costs as investors demand richer returns for higher leveraged paper.

Ceva’s €2bn dividend deal closed at 475bp over Euribor at 98.5 OID, from initial guidance of 425bp-450bp, at 99 OID.

Hotelbeds’ €400m add-on term loan closed at 450bp over Euribor at par, the tighter end of 450bp-475bp guidance. It will be used with €100m of cash on the company’s balance to pay a shareholder dividend.

Pricing for both Ceva and Hotelbeds increased massively - from the 300bp and 325bp they were paying on their previous leveraged loans, respectively.

“Companies pay interest, not the sponsor. Sponsors are taking money off the table and debt is a lot cheaper than equity,” a second syndicate head said.

The senior banker added: “The dividends represented a high increase in interest payments but in absolute terms it was still worth it for the sponsors if they got money out. Paying 450bp-475bp is still a pretty good rate in absolute terms as the base rate is zero, which is not that expensive. It feels like the market is happy to do them if they are paid the right premium.”

Ceva paid out a €228m dividend and also repaid €232m of more expensive payment-in-kind paper. As well as the higher interest margins, the company was downgraded to B3 from B1 as leverage rose to 6.2 times net and 7.3 times gross, sources said.

“They paid for the leverage and €500m of cash to play with but that is maybe not such a bad trade. They paid a high price but got a lot of flexibility,” the second syndicate head said.

Hotelbeds paid a €500m dividend to shareholders. Investors seemed pleased with Hotelbeds as it provided new paper and a better return for a company that had been performing well.

“Hotelbeds’ dividend recap made sense but they needed to pay up for it,” an investor said.

MORE TO COME

While the high costs involved could put some sponsors off launching dividend deals, it is expected that Europe’s leveraged loan market will see more such deals, especially from companies that have performed well and delevered.

“There is always a short window for dividend recaps. As long as M&A is slow, why not do one for a popular, delevered credit,” another banker said.

However, higher pricing is not always enough to attract investors, as evidenced by TenCate’s deal, which has had to make a series of changes to its add-on term loan to help it over the line.

The size of the add-on term loan was cut to €90m from €130m at launch, the OID has been widened to 98.5 from 99 and leverage reduced to four times from 4.25 times. Its ability to make disposals were also revised.

Sponsor Gilde Buy-Out Partners will now take a smaller dividend payment of up to €65m after the changes.

Editing by Christopher Mangham

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