Surging investor demand for leveraged loans kicked open the door to opportunistic transactions early in 2021, and this door has remained wide open throughout the year.
While term loan repricing and refinancing activity has cooled off from the supercharged levels seen earlier this year, the flow of dividend recapitalizations has remained strong. As a result, borrowers backed by private equity sponsors are paying out dividends at a record pace, financed by leveraged loan transactions.
In the year through Sept. 22, such dividend payouts totaled $26.8 billion, the most for any comparable period since LCD began tracking this data two decades ago. The current tally is just 10% short of the full-year record, $29.9 billion in 2013. The 2021 surge in dividend recaps follows two years of below-average dividend activity. In such dividend activity, a private equity portfolio company takes out a new loan to finance a payment to the PE sponsor and often to refinance debt. Looking back at the 10 years since the end of the global financial crisis, sponsors extracted $16.5 billion on average via dividend recap deals.
Of course, opportunistic activity dried up in the second quarter of last year, at the onset of the COVID-19 pandemic. However, this drought did not last long, as the loan market swiftly recovered. In the first quarter of 2021, dividend payouts ballooned to $10.7 billion, the highest reading since the second quarter of 2013. While the next two quarters have not matched this level, they remained well above average.
Looking at leveraged loan volume raised to fund dividend recaps — which typically include refinancing existing debt — 2021 activity is closing in on the full-year record, with more than three months left to go until year-end. As of Sept. 22, sponsored dividend recaps totaled $50.6 billion, slightly below the $51.1 billion during all of 2013.
The wave of investor demand for leveraged loans lifted all areas of the $1.29 trillion asset class.
Sponsor-backed M&A loan issuance, including buyouts, mergers and acquisitions, is also at a record pace, at $179 billion, just 11% short of the 2018 full-year record ($202 billion). Indeed, that record-breaking year for sponsored M&A is providing a pool of candidates for dividend recaps in 2021. For example, this month Autokiniton US Holdings Inc. completed a $375 million incremental term loan to fund a shareholder dividend. KPS Capital Partners acquired the company in 2018. Other recent examples of such deals include SRS Distribution, Veritext and Pro Mach. That deals from 2018 are creating dividend opportunities today stands to reason. Over the last 10 years, the average time between a buyout and a dividend recap is about three years, according to LCD.