Dividend recaps plummet 89 pct in Q4

Dividend recaps dropped dramatically in the fourth quarter, according to data from Thomson Reuters Loan Pricing Corp.

Completed dividend recap issuance hit roughly $577 million as of December 2, with another $280 million in process, for a total of $857 million, LPC said. That is down 89 percent from $7.8 billion completed in the third quarter and $8.2 billion in the second quarter.

The fourth quarter has seen only $3.1 billion in loan volume with nothing on the calendar, said Rob Polenberg, a vice president at S&P Capital IQ’s Leveraged Commentary and Data unit. This compares to $12.1 billion in the third quarter and $15.2 billion in the second, Polenberg said.

Q4 is on pace to have the lowest volume of loans backing dividends since Q4 2011, Polenberg added.

Dividends are considered opportunistic deals, he said, noting: “Opportunistic deals are not in favor right now. Repricings are not in favor. It’s just a tough market to do things right now.”

The drop comes amid the cancellation of several dividend deals. SiteOne Landscape Supply, a portfolio company of Clayton Dubliner & Rice, pulled a planned $350 million term loan in October that it planned to use to pay a distribution to its sponsor, LPC said. CD&R invested in SiteOne in 2013.

In October, ABB Optical Group cancelled a $650 million loan that it had expected to finance a dividend recap, LPC said. ABB Optical, a contact lens distributor, is backed by New Mountain Capital.

Apple Leisure, a Bain Capital portfolio company, also yanked a $510 million covenant-lite dividend recap on October 2, LPC said. Bain invested in the travel and resort company in 2013.

“There is a ton of nervousness in the markets right now,” one PE executive said. “It’s not specifically related to anything, but generally related to concerns over China, commodities, the U.S presidential political process, regulatory changes, rate increases and a looming recession.”

Another lending executive cited numerous issues for nervousness in the lending market, including concerns about when the Federal Reserve will raise interest rates, the China slowdown and continued uncertainty in the energy markets. “There seems to be more bad news than good, and lenders like ourselves will tend towards more caution,” the lending executive said.

The second source noted banks are more likely to support a new buyout where a sponsor is investing significant cash backing a company’s growth plan. It’s harder for lenders to get behind a PE firm taking a large dividend out of company where they could potentially lose interest, the source said.

Polenberg said just 4 percent of deals are getting done where debt to EBITDA is greater than 7x. That’s compared to 15 percent of deals last year. “There are lots of regulations restricting the amount of leverage you can put on a deal,” he said.

Executives for ABB declined comment. SiteOne and Apple Leisure could not be reached for comment.

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