With few exit opportunities in the current market environment, private equity firms have been extracting more dividends from the companies they control, says Moody’s Investors Service in a new report.
The new report indicates that U.S. speculative-grade companies increased dividend payouts by more than 10% in 2011 and the first quarter of 2012, “as private equity sponsors sought to extract returns from sponsored companies at a time when M&A opportunities have been limited and the IPO market has been soft.”
The rating agency reports that, in the first half of the year, rated companies mostly controlled by private equity sponsors launched at least 35 debt-financed dividend recapitalizations worth more than $11 billion.
“We expect dividends to remain a popular way to extract returns in an uncertain global environment with limited exit opportunities for private equity owners,” said Lenny Ajzenman, senior vice president with Moody’s. “That said, debt funding has been less aggressive than during the bubble era, and leverage remains well below the peaks of 2006-2007.”
More than half of the 35 companies that executed dividend recaps this year saw leverage increase as a result, Moody’s notes. And, it says that debt increased significantly for some later-vintage leveraged buyouts, which were executed in 2008 to 2011.
But the rating implications of these changes have been limited, Moody’s says. Few of the private equity-sponsored companies that completed dividend deals in 2012 saw their ratings downgraded as expectations of a leveraging transaction were already incorporated, it notes. Just four of the 35 dividend recaps resulted in a ratings downgrade.