Leveraged loan issuance roared back to prominence in 2010, after having spent the past two years in hiding. A fourth-quarter surge pushed the yearly total to $234 billion — compared to just $77 billion in 2009 — for what S&P Leveraged Commentary & Data says was the largest year-over-year increase on record (205%).
Still not close to the $400+ billion tally from 2006 or $500+ billion tally from 2007, but a major upswing nonetheless.
What’s striking about the 2010 figures, however, is that 16% of the new notes were sold to pay for dividends. That not only dwarfs last year, but also the prior high in 2005 (12%).
Private equity-backed companies issued the lions share of dividend-related loans (84%), also breaking its own record of 76% from 2004.
So why so many dividend deals last year? For starters, lots of private equity firms are nearing the point of needing to raise new funds, and need to remind investors that they still can produce liquidity. Dividend recaps can help cut those checks quickly, while retaining residual portfolio value. Trade sales were difficult to come by in a year when corporations were hoarding cash, and PE fund investors have begun to frown on sponsor-to-sponsor, or secondary, sales. IPOs were a non-starter in most cases, and even successful flotations often come with lengthy lock-up periods.
On the buyside, there was simply a glut of demand. Most of these folks would prefer to do a new deal than re-do an old one, but buyers took what they could get.
We’ve already seen some indications that the dividend parade is beginning to slow, and I’d expect that to continue as both financial and corporate acquirers do more new deals in 2011. In the meantime, it will be interesting to watch the performance of all these companies whose post-recessionary revenue increases were met by weightier debt burdens.