Love ‘em or hate ‘em, dividend recaps were a hallmark of the recent buyout boom. Firms would buy companies in highly-levered transactions, and then pile on more debt post-close, in order to reimburse their (paltry) equity commitments. All fun and games until somebody can’t pay the Piper Jaffray.
Critics (like me) assailed the practice as short-term greed, and claimed it was rampant. Industry insiders called us ignorant alarmists, adding that it was rare, safe and legal.
Well, we finally have some behind-the-curtain clarity from Moody’s Investors Service, which yesterday released a report called “Private Equity: Tracking the Largest Sponsors.” It examines leveraged buyouts it rated between 2002 and 2007, and howequity sponsors differed in their post-close financial management (download report here)
Here’s the key paragraph, in regard to dividend recap frequency:
Large private-equity sponsors took dividends in over 45% of the deals rated before September 2006, as seen in the table on page seven, with nearly 30% taking dividends large enough to remove all or nearly all of the equity that contributed to the initial transaction. In 10% of the deals, private-equity sponsors took a large dividend within the first year of the initial rating. A large dividend is defined as one that is equal to, or greater than, 80% of the equity contributed to the initial transaction.
Moody’s also learned that fast-cash lust varied from firm to firm. For example, six LBO shops did dividend recaps on more than 50% of their deals: Welsh Carson Anderson & Stowe, Cerberus Management, Providence Equity Partners, Carlyle Group, Madison Dearborn Partners and Thomas H. Lee Partners. You might notice Blackstone missing from this group, but it shows up when it comes to firms most likely to do take dividends of 50% or more (joining Cerberus and TH Lee).
On the flip side were KKR, Goldman Sachs and Bain Capital, which took dividends in only around one-third of their deals. KKR actually turns up repeatedly in the report for its lack of aggression, which is an surprising contrast to its purchase price behavior. For example, KKR only did add-on acquisitions for 21% of its portfolio companies.
The report also noted that only two of its tracked companies defaulted — or 1.1%, compared to 3.4% for high-yield. That’s pretty impressive, but would be more so if it holds through the economic slog of 2008.