Private equity using loans for payouts at fastest pace in years

[NEW YORK] Private equity firms are hitting the US leveraged loan market at the fastest pace in years to fund shareholder payouts with about US$8.6 billion of dividend recapitalisation deals launched this month.

That's the most since US$9.9 billion came in all of September 2017, the last time the market saw activity of this magnitude, and puts the month on track for one of the largest for these types of deals since the last financial crisis, according to data compiled by Bloomberg.

The dividend recapitalisations, which refinance debt as well as funding payouts, account for about a quarter of this month's US$31.5 billion of loan launches, the data show.

Reston, Virginia-based Ellucian is selling a US$1.6 billion first-lien loan, the seventh offering of its kind to emerge since Labor Day. Buyout firms TPG and Leonard Green & Partners, which bought the education software provider in 2015, will use part of the proceeds for a US$298 million dividend, according to a report from S&P Global Ratings.

Dividend recapitalisations, where private-equity sponsors extract a payment from a company in their portfolio, have so far been well received, which could attract more would-be borrowers.

The surge comes when there's little else for investors to buy due to light volume. A decline in buyout activity is also encouraging sponsors to sell these loans at a time when the cost of doing so is relatively cheap.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

ECi Software Solutions, owned by Apax Partners, sold a US$740 million loan earlier this week that funded a US$118 million payout, according to S&P. Pricing on the deal, which increased in size from US$710 million, was also slashed after investor demand reached US$1.8 billion, according to a person familiar with the matter, who asked not to be identified because the transaction is private.

Some of the companies that have proven to be more resilient in the pandemic have taken on more debt, such as packaged food and broadband.

Issuers have also used some of the cash to extend maturities, a credit positive in some cases even if leverage - a key measure of debt-to earnings - is rising.

In the case of Ellucian, leverage will increase to about 8.5 times from 7.8, according to S&P. But it will also refinance debt maturing in the next two to three years to 2027 and 2028, S&P wrote.

The Ellucian loan, led by Bank of America, is offered at a spread of 400 basis points over the London interbank offered rate and a discounted price of 99 cents on the dollar. Commitments are due Sept 24.

BLOOMBERG