Visible Hands: The Divid-end of an Era 👛
We explore dividend recapitalizations, a risky move that requires taking on debt to pay out dividends.
Our recent newsletters have been on the longer side, so we are experimenting with a shorter read! This week we are taking a quick look at debt recapitalizations.
September 2020 was a special time in the economy. It’s when debt recapitalization deals hit the most they’ve been ($8.6 billion) since 2017. For instance, the education company Ellucian sold a $1.6 billion first-lien loan, which would pay out nearly $298 million in dividend payments. The loan majorly increased the amount of leverage on the firm, which had been bought in 2015 by TPG and Leonard Green & Partners.
What made this so concerning? According to the Financial Times, almost 24% of money raised in the US loan market went to dividends for private equity owners. Dividends can be controversial if used when the financial stability of a company is rocky and bankruptcy is possible. The more debt a company takes on, the rockier it is. If dividends are fueled with that debt, debt and dividends go hand-in-hand.
The second half of last year saw $27 billion of borrowing to pay for dividends or debt restructuring; 2021 has also been intense ($4.7 billion in the first six weeks or an annual rate of more than $40 billion).
As the NYT reported, these transactions have been spurred by cash available with low interest rates, COVID-19 uncertainty put some borrowing on hold and the desire of private equity companies to keep their clients on their good side.
As an investor:
Debt recaps + private equity: If you want to know more about debt recapitalizations, check out this week’s article from the Washington Post.: “Dividend recaps, in particular, have come under fire because the companies in question are loaded up with new debt, which is then used to pay shareholders. Nonetheless, the practice has surged in the last half of 2020 and first months of 2021.”
Revisit our PE post: We wrote about private equity, pension funds, and more in detail in October, ICYMI check it out here.
As a citizen:
Nevertheless, she persisted: Elizabeth Warren has been a critic of private equity practices. According to the NYT, “part of her legislative agenda remains holding the private equity industry ‘accountable for what happens with their target companies’”. You can see an explanation of her proposed Stop Wall Street Looting Act here. Suggested regulations include “Putting private equity firms on the hook for the debts of companies they buy, making them responsible for the downside of their investments so that they only make money if the companies they control flourish.”
Private Equity Stakeholder Project: The Private Equity Stakeholder Project is an activist group trying to challenge the industry’s negative impact on labor and communities. You can find more information on how private equity affects different stakeholders on their website.
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