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Where is dividend recapitalization finding its liquidity from?

Chanderlekha Nayar

Interesting week for high yield bonds, leveraged loans see little activity (Part 6 of 7)

(Continued from Part 5)

What is dividend recapitalization?

A company takes on debt and uses proceeds to pay a dividend to shareholders. Dividend recapitalization activity tends to track the market conditions. Bull market allows higher dividends as issuers can tap the excess liquidity in the market. In a bearish market, the activity slows down. However, in any circumstance, the dividend recapitalization deals adds burden to the company’s current debt profile, weakening the balance sheet. Despite the fact that the Fed’s tapering reducing the liquidity in the market and relatively lower fund flows in the leveraged loan space (BKLN), dividend recapitalization deals continued to find the room for leverage.

The annual volume of loans backing dividend recapitalization rose to a total of $9.3 billion in February 2014, up from $8.8 billion in the same period last year. Last year ended at very high note with $70 billion bucked in the dividend recapitalization loans, highest since the 2005 levels. The 2014 trend is much on the similar trail with many private equity owners benefiting from the situation.

The total number of loans that hit the market last week was 19 compared to 21 deals in the previous week. Though the deal number was smaller, the higher dollar value pushed the average ticket size to $1.37 billion from $670 million in the previous week.

Sycamore Partners, a private equity firm based out of New York was again on the headlines last week with Talbots Inc., issuing $355 million dividend recapitalization notes. Talbots Inc., a multi-channel upscale fashion retailer was acquired by Sycamore Partners acquired in August 2012 for $391 million (including debt).

Among the other major dealings of the last week was Ennis-Flint, a chemical company rated single B, tapped the market for $465 million dividend loan.

Acquisitions and LBOs found their way in leveraged loan market

High yield bond (JNK) market was dried up, from the M&A perspective last week. However, a relatively fine number showed up in the leveraged loan (SNLN) board. RCS Capital Corporation (RCAP) with a market capitalization of $741 million tapped the market to raise $725 million loan ($575 million senior secured first lien B2 rated facility at 6.68% yield and $150 million senior secured second lien term loan with Caa1 rating had a yield of 11.52%). The loan is expected to be used to acquire Cetera Financial Holdings, Inc. RCS Capital Corporation (RCAP) is a holding company that provides distribution, investment banking and capital markets, transaction management, due diligence, marketing and promotional services.

Other deals were from SBP Holdings and NewWave, both privately held companies that raised loans for acquisition purpose.

Leveraged loan index and ETF price

The S&P/LSTA U.S. Leveraged Loan 100 Index, which tracks loans in the B to BB rated category, declined moderately, while the main leveraged loan ETF price (BKLN) and (SNLN) remained muted. The high yield bond prices for iSharesiBoxx $ High Yield Corporate Bond ETF (HYG) was down by 9% while the SPDR Barclays Capital High Yield Bond ETF (JNK) price declined by 1%.

Continue to Part 7

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