Private equity groups including Ares and Golden Gate Capital have raised more than $20bn in the US leveraged loan market through the companies they own to award themselves a bumper payday.
Dividend deals in the loan market have reached a total of $21.7bn, according to data from LevFin Insights, a unit of rating agency Fitch Ratings. It marks a new quarterly high for data going back to 2016.
The deals come as fears over rising inflation pushing interest rates higher have increased the allure of leveraged loans for investors. Loans track a floating interest rate that rises and falls with a benchmark, as opposed to being fixed such as the coupon payments of a bond.
Private equity groups have jumped on the demand, pulling money out of companies they own and loading them up with fresh debt before the brightening economic outlook fades.
Several of the deals have come alongside refinancing transactions, underscoring the pace of the recovery following last year’s Covid-19 induced sell-off and allowing companies to push out debt maturities.
“It’s the next frontier of aggressive deals come through,” said Jessica Reiss, head of US leveraged loan research at Covenant Review. “At the start of the year, it was all about refinancing debt. Now that is done, it’s about funding dividends.”
Earlier this month, security company Convergint Technologies raised roughly $1.4bn to refinance its debt and fund about a $600m dividend to its owner Ares, according to LevFin Insights.
The deal will push the company’s adjusted debt to about nine times its earnings, according to S&P Global Ratings’ preferred measure of leverage, which strips out cash and adds in items such as leases. That compares with an average of about six times for the broader leveraged loan market. It will also slash the company’s remaining operating cash flow to about 5 per cent of its total debt, compared with 15 per cent before.
Ares also recently received a dividend, funded from a $650m loan issued by DuPage Medical Group, as well as cash already on the company’s balance sheet.
Ares and Convergint Technologies declined to comment. DuPage said the recent deal allowed the company to refinance its debt, lower interest expense and “take advantage of positive market conditions”.
“The dividend was almost entirely paid with cash on hand at the company,” it said.
Analysts and investors noted that many of the more than 30 companies issuing dividends had proved resilient — though not immune — last year when the economic impact of coronavirus had ravaged other debt-laden companies. Technology, services and healthcare companies have dominated the list of dividend issuers.
One of the largest dividends so far this year was paid out to Golden Gate Capital, where a $785m loan issued by third-party hospital management company Ensemble Health Partners flowed back to the private equity group, minus fees for the transaction. Golden Gate’s payday also got a $100m bump up from the planned size of the loan due to investor demand for the debt.
The company suffered about a 5 per cent decline in earnings last year, according to S&P, with patient volumes still below pre-pandemic levels.
Golden Gate had acquired a 51 per cent stake in Ensemble in May 2019 for $1.2bn, funded in part by new debt, according to a person familiar with the transaction. The deal was first reported by the Wall Street Journal. Golden Gate declined to comment.
Matthew Mish, a credit analyst at UBS, said the leveraged loan dividend deals were a way for private equity groups to recoup initial investments when sustained, elevated equity prices had made it difficult to turn a quick profit through acquisitions and sales.
“It’s hard to buy cheap businesses and wait for multiples to increase,” he said. “Instead, you have the opportunity to issue debt and pay yourself back if the business is performing well.”