Capital Markets

Dividend Recaps Back in Vogue

Since late June, at least six companies controlled by some of the largest, best-known buyout firms have borrowed money to pay their private equity ...
Stephen TaubJuly 13, 2005

A dividend recap — in which a company borrows money to make a cash payment to the private equity firms that own it — is one of the few ways that buyout firms can cash in on their investments, observes TheDeal.com. Otherwise, says the website, the firms would need to take the company public, then issue their own shares, or they would need to sell the company outright.

Until recently, adds TheDeal.com, dividend recaps were rare. But since late June, at least six companies controlled by some of the largest, best-known buyout firms have borrowed money to pay their private equity owner a dividend.

Wireless-tower operator AAT Communications Corp., for example, plans to pay out $100 million to a number of private equity owners, including Charterhouse Group International and Sandler Capital; cable-television operator Patriot Media & Communications LLC intends to make a payment to Spectrum Equity Investors; and oil-pipeline company Magellan Midstream Holdings plans a payment to Madison Dearborn Partners and Carlyle Group affiliate Carlyle/Riverstone.

Thedeal.com also points out that in the past month, dividends were paid out by Wire Rope Corp. of America Inc. to KPS Special Situations Funds; by N.E.W. Customer Service Cos. to TH Lee Putnam Ventures and Freeman Spogli & Co.; and by Skilled Healthcare Group to Heritage Partners.

Such payments were so common a year or so ago, notes the website, that some skeptics warned of a virtual bubble. Most of these cash payments were financed using junior-grade, pay-in-kind notes, which are costlier than other forms of debt, it added.

Earlier this year, however, bond investors grew skittish about scooping up this kind of paper, and a number of sponsors pulled their planned recaps, according to the report.

“The cooling coincided with sharply higher spreads in the high-yield bonds market,” M. Christopher Garmen, a vice president and high-yield market strategist at Merrill Lynch & Co., told TheDeal.com.

Junk bond spreads have since narrowed, the website acknowledged. However, the high-yield market still hasn’t fully warmed up to deals involving pay-in-kind notes, added the site, so buyout sponsors are tapping the senior loan markets.