Private equity-backed companies across Europe, the Middle East and Africa (EMEA) could take on an additional €41bn in debt before risking credit rating downgrades, according to a report by Bloomberg citing Moody’s Ratings.
The ratings agency expects dividend recapitalisation activity to remain elevated until dealmaking recovers, as buyout firms seek alternative ways to return capital to investors.
Recent transactions include Spanish fuel retailer Plenergy, which raised a €400m leveraged loan earlier this month, partly to fund a shareholder payout. Strong investor demand allowed the company to reduce the loan’s interest margin from 400 to 375 basis points above the benchmark rate.
Health supplement manufacturer Sunday Natural also secured a €515m financing package in late September to fund a shareholder distribution.
Dividend recapitalisations allow private equity sponsors to extract cash from portfolio companies by raising additional debt, although the strategy increases leverage and can heighten financial risks.
Moody’s found that the latest wave of transactions has not resulted in widespread credit rating downgrades, largely because deals have been concentrated among companies with strong operating performance and sufficient cash flow to service additional borrowing.
The ratings agency said companies undertaking dividend recaps had typically built up significant financial headroom in the year preceding a transaction compared with their peers.
The findings come as private equity firms face mounting pressure to return capital to investors. According to Bain & Company, buyout firms hold approximately $3.8tn in unsold assets, while average portfolio company holding periods have increased to seven years, compared with five years in 2010.
Moody’s expects dividend recaps to remain an attractive liquidity option for cash-generative businesses with limited reinvestment opportunities, particularly those held beyond the traditional four-to-five-year investment period, although not all of the estimated €41bn in additional borrowing capacity is expected to be used for shareholder distributions.
