Key Takeaways
- • Moody's estimates European, Middle East and Africa (EMEA) private equity-backed companies could absorb an additional €41bn of debt before facing credit rating downgrades, according to a Bloomberg report citing Moody's Ratings.
- • Moody's expects dividend recapitalisation activity to stay elevated until dealmaking recovers, as buyout firms seek alternative ways to return capital to investors.
- • Spanish fuel retailer Plenergy raised a €400m leveraged loan earlier in October, partly to fund a shareholder payout, and cut the loan's margin from 400 to 375 basis points over benchmark on strong investor demand.
- • Health supplement maker Sunday Natural secured a €515m financing package in late September to fund a shareholder distribution.
- • Buyout firms hold approximately $3.8tn in unsold assets, and average holding periods have risen to seven years from five years in 2010, according to Bain & Company.
Summary
Private equity-backed companies across Europe, the Middle East and Africa could take on an additional €41bn in debt before risking credit rating downgrades, according to a Bloomberg report citing Moody's Ratings. Moody's expects dividend recapitalisation activity, in which sponsors extract cash from portfolio companies by raising new debt, to remain elevated until dealmaking recovers, as buyout firms look for alternative ways to return capital to investors.
Recent transactions illustrate the trend. Spanish fuel retailer Plenergy raised a €400m leveraged loan earlier in the month, partly to fund a shareholder payout, and benefited from strong investor demand that allowed it to reduce the loan's interest margin from 400 to 375 basis points above the benchmark rate. Health supplement manufacturer Sunday Natural secured a €515m financing package in late September to fund a shareholder distribution.
Moody's found that the latest wave of transactions has not produced widespread downgrades, largely because deals have concentrated among companies with strong operating performance and sufficient cash flow to service additional borrowing. The agency said companies undertaking dividend recaps had typically built up significant financial headroom in the year before a transaction relative to peers. Dividend recaps raise leverage and can heighten financial risk, however.
The activity comes 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, and average holding periods have increased to seven years from 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. Not all of the estimated €41bn in additional capacity is expected to be used for shareholder distributions.
Recent transactions illustrate the trend. Spanish fuel retailer Plenergy raised a €400m leveraged loan earlier in the month, partly to fund a shareholder payout, and benefited from strong investor demand that allowed it to reduce the loan's interest margin from 400 to 375 basis points above the benchmark rate. Health supplement manufacturer Sunday Natural secured a €515m financing package in late September to fund a shareholder distribution.
Moody's found that the latest wave of transactions has not produced widespread downgrades, largely because deals have concentrated among companies with strong operating performance and sufficient cash flow to service additional borrowing. The agency said companies undertaking dividend recaps had typically built up significant financial headroom in the year before a transaction relative to peers. Dividend recaps raise leverage and can heighten financial risk, however.
The activity comes 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, and average holding periods have increased to seven years from 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. Not all of the estimated €41bn in additional capacity is expected to be used for shareholder distributions.
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