Dividend recapitalisations of buyouts are becoming almost inevitable. They give sponsors a quick return, but increase leverage and sharpen risks – even so, few debt bankers say no.
Addressing IFR’s Financing Leveraged Buyouts Conference in London on November 2, Paul Gibbon, executive director of leveraged syndication at investment bank UBS, said: “Secondary buyouts and recaps are now the key exit routes for sponsors”.
As well as simply returning liquidity to sponsors, the recap reduces the timescale over which a return is being made on investments, supporting an ultimately higher IRR.
Less talked about by sponsors is the extent to which recaps reduce exposure to investment risk, by quickly extracting capital from investments. It is this factor that ought to make the dividend recap a much harder sell to debt bankers, by potentially casting doubts on the commitment of sponsors to portfolio companies in which they have little or no capital exposed.
“The dividend recap means debt holders take up extra risk for little return, especially when fees and margins tend to be lower than in a primary financing,” according to Gibbon, but far from debt providers walking away from deals, he said, “decline rates are extremely low”.
Gibbon said part of the ease with which these transactions were being concluded was because “banks and funds approach their credit committees with a ‘known’ proposition [where the original buyout has been funded relatively recently]. Banks can be happy to stay with a company,” he said.
Gibbon also noted that in the current climate the recap could tap multiple sources of debt, such as senior debt, mezzanine, CDOs and CLOs.
In a highly liquid borrowers’ market the prospect that dividend recaps can extract capital without destroying value is a gamble that debt bankers are being increasingly forced to take.