Borrowing blitz: private equity groups out to draw dividends

Private equity firms are joining a global borrowing surge to draw dividends from their Australian investments, prompting the nation's banks to compete against US lenders for their business.
By · 13 Sep 2013
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13 Sep 2013
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Private equity firms are joining a global borrowing surge to draw dividends from their Australian investments, prompting the nation's banks to compete against US lenders for their business.

Pacific Equity Partners is talking to financiers here and in the US as it seeks a fifth loan this year to refinance and extract cash from the Sydney-based fund's investments.

KKR is tapping local banks to borrow $US300 million against its medical business Genesis Care to help pay itself a dividend.

There have been about $5 billion of such loans across Australia in 2013, according to data compiled by Bloomberg.

Private owners of Australian companies, from PEP to TPG Capital, are capitalising on favourable debt markets to return cash to themselves, even as some consider stake sales that would end their responsibility for those businesses.

Local banks are striving to maintain lending business in the face of competition from the $US2 trillion US high-yield market, where so-called covenant-lite debt is tied to a rate at least 200 basis points lower than Australia's benchmark rates.

"What the banks seem to be doing is to compete more aggressively for what they perceive as limited growth opportunities," said Brian Johnson, a Sydney-based banking analyst with CLSA.

"I certainly see credit underwriting standards at the moment being loosened. Quantitative easing has lowered interest rates around the globe and that fuels all sorts of excesses."

Loans that fund payouts are surging as firms borrow cheaply against investments to pay themselves rather than sell assets at a time when merger and acquisition activity is slowing. While high-yield loans in the US for buyouts have fallen by more than two-thirds since 2008, dividend loans have risen almost tenfold, according to Standard & Poor's data.

"In an environment of relatively lower deal volumes and a greater supply of lenders putting money to work, that creates a positive environment for issuers," said John Whelan, Commonwealth Bank's head of acquisition and leveraged finance. "The improved terms and conditions are a function of the levels of supply and demand."

Australian banks are competing with the US high-yield bond market, which issues loans with fewer conditions. In the past year, local companies including Fortescue Metals and Hoyts have borrowed in that market, whose lenders are often institutions.

More than $US418 billion of leveraged loans have been raised in the US this year, a 69 per cent increase on the same period in 2012, according to a UBS report.

The rise in Australian dividend loans reflects "competition in the global lending markets, coming principally out of the US, and the progressive reduction of the base rate in the local market", said Tim Sims, a managing director and co-founder of PEP.

KKR is tapping lenders in Australia for a dividend recapitalisation of Sydney-based Genesis Care, after failing to lure US investors for a similar deal in June, people familiar with the matter said.

New York-based KKR may also borrow in the US against Australian mining services company Bis Industries, even as it considers ways to exit the 2006 purchase.

PEP is borrowing $US1.05 billion in the US against Spotless Group, the Melbourne-based facilities services company it bought last year.

The debt will replace $686 million of loans provided by Australian banks for the purchase. PEP is also seeking a dividend recapitalisation locally for Peters Ice Cream, after acquiring the Australian food company last year.

Spotless' debt is expected to rise to seven times earnings before interest, taxation, depreciation and amortisation following PEP's refinancing, S&P said.

The agency assigned Spotless a B rating, citing its "highly leveraged" risk profile as a constraint on the grade.
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