February 27, 2013 / 3:20 PM / in 5 years

REFILE-Moody's sees dividend recaps slowing in 2013

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.


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 returns.

“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 Ajzenman.

“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 facility.

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.

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