Why dividend recapitalization is the sweet spot for leveraged loans

Market Realist

Why high yield bond issuance reveals a horizontal market (Part 4 of 4)

(Continued from Part 3)

Dividend recapitalization

While M&A activity was still below market prospects, demand for dividend recapitalization deals was mostly strong last week. Dividend recapitalization loan volume outstanding increased to $70 billion in 2013 from $55 billion in 2012. In corporate finance, companies use dividend recapitalization to buy stock or pay dividends to shareholders. Companies generally issue bonds to raise that money. This is a doubled-edged sword. On the one hand, the issuer is paying a dividend to shareholders, which uplifts the share price. However, on the other hand, the company’s balance sheet piles on debt—which increases the company’s interest expenses and affects profitability margins.

Last week, 21 deals hit the market, at an average ticket size of $670 million. This compares to the 22 deals of the previous week at an average ticket size of $841 million.

Though the deal size was small in the dividend recapitalization space, and at tight spreads, investors tried to accumulate a little share on each of the deals to compensate for the lower yields.

Among the major deals last week was Asurion Company, LLC, a mobile phone insurance services company that placed a $1.25 billion loan for dividend recapitalization. LANDesk Software, an IT service management company, took out an additional $50 million on its first-lien term loan, totaling $380 million in value, while also taking out a new $130 million seven-year second-lien term loan. The company is expected to use the proceeds for dividend payouts.

Mallinckrodt Pharmaceuticals (MNK) saw relatively strong demand. It produces specialty pharmaceutical products (including generic drugs and imaging agents) and is based in Dublin, Ireland, with U.S. headquarters in St. Louis, Missouri. The company has a good credit rating.

Cadence Pharmaceuticals, Inc. (CADX), at a higher yield compared to the other deals that came to market, rewarded some investors last week.

The S&P/LSTA U.S. Leveraged Loan 100 Index, which tracks loans in the single B to BB rated category, declined moderately, while the main leveraged loan ETF price (BKLN) remained unchanged.

To learn more about new issuance for leveraged loans, see the Market Realist series High yield bonds and leveraged loans outlook: A key opportunity.

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