Record sales of unwanted loans fuel dividend payouts
U.S. companies have sold a record amount of notorious loans to raise funds for dividends this year, fueled by a recovering economy and investor demand for higher-yielding assets.
Non-financial companies, including insurer Asurion LLC and fast food restaurant chain Whataburger Inc., have issued more than $ 72 billion in speculative-grade loans to pay dividends in 2021, according to S&P Global Market’s LCD Intelligence. This is already an annual record for data dating back to 2000, surpassing the previous 2013 record of $ 54.4 billion.
The record marks a sign that companies are becoming more comfortable with their cash-filled balance sheets and the trajectory of the economy, analysts said. Leverage loans are typically issued by companies that are heavily indebted to their earnings, making them more sensitive to the trajectory of the economy.
Now economists are upping growth forecasts for next year, suggesting a rebound in spending and production slowed by supply chain disruptions and the Covid-19 Delta variant. This offsets the consequences of issuing debt to fund dividends, which can strain credit ratings and borrowing capacity of companies, since the money is not used for operations.
U.S. firms have also issued a record amount of junk bonds this year, while sales of leveraged loans are on track to surpass the 2017 record of $ 503 billion. After the Federal Reserve cut interest rates to near zero and began buying billions of dollars in bonds, many companies were able to cut interest costs and raise record amounts of cash by selling junk debt, thanks to strong demand from investors looking for higher returns.
Some companies are starting to pass this money on to their shareholders or to spend it. In addition to dividends, more than $ 294 billion in badly rated loans have been sold to fund business mergers and acquisitions, breaking the previous record of around $ 275 billion in 2018 over the coming months.
“Much of the loan market’s repricing and refinancing needs have been addressed,” said Anders Persson, director of global fixed income investments at Nuveen. “I expect we will see less of these deals and focus more and more on M&A opportunities and dividends.”
One of the main beneficiaries of the boom: private equity. Companies owned by private equity firms sold more than $ 60 billion in leveraged loans to pay dividends, another 21-year record.
Dividend payments can provide private equity firms with additional liquidity and a temporary increase in profits. They also help pay business investors who have paid money to buy the business. This group typically includes college endowments and pension funds, among other institutions.
Dividend payments reward private equity investors as these companies pursue new debt buyouts. The low returns on traditional fixed income assets have caused many investors to turn to private equity and other alternative asset managers for higher returns. Meanwhile, the average LBO price has risen this year, requiring more upfront cash from buyers.
The biggest buyers of low-rated loans are secured loan bonds, which bundle debt into securities. CLO sales set a record this year at more than $ 124 billion, with analysts expecting them to remain high through the end of the year, providing continued demand for new loans.
Funds that hold leveraged loans, whose payments typically increase with interest rates, can help investors hedge their holdings of fixed-rate bonds against Fed increases and higher-than-expected inflation. , which erodes fixed payments of bonds, said Rajay Bagaria, president and CEO. Head of Investments at Wasserstein Debt Opportunities.
“Investors are increasingly turning to leveraged loans,” he said. “The demand for bad debt has broken all records. “
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Strong investor demand has helped push yields on leveraged loans to new lows, allowing borrowers to take on more debt at lower interest costs. The average yield to maturity of S & P / LSTA index loans fell to a record low of 4.2% at the end of September.
Earlier this year, Asurion, an insurer for personal technology devices such as cellphones and tablets, sold $ 3.3 billion in single-B plus and single-B rated loans to fund a dividend to its owners. , the second largest transaction this year. The loans brought the company’s total debt to more than six times earnings before interest, taxes, depreciation and amortization, according to a Moody’s Investors Service report.
Last month, Autokiniton US Holdings Inc., an auto parts supplier owned by KPS Capital Partners, sold a $ 375 million loan due in 2028 to fund a dividend to shareholders. The disproportionate demand from investors allowed the company to increase the loan amount, which is rated single-B.
About three in four loans sold in 2021 had a single B credit rating. Despite the high volume, the average yield on newly issued, B-rated corporate debt this year is around 4.8%. This is lower than the average return of 5.9% over the past 10 years, suggesting that investors are not being paid enough for the additional risks they take, according to a recent report by S&P Global Ratings.
Mr Persson says his company is comfortable getting a little extra yield on lending, given Fed support and economic growth, but remains cautious about which companies to choose.
“We are very aware of the low quality tilt towards new loan issuance, which is a bit stretched in our view,” he said. “This makes credit selection more important than ever. “
Write to Sebastian Pellejero at [email protected]
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