January 22, 2020 / 3:44 PM / a month ago

Divisive 'dividend recap' deals return in red hot debt market

LONDON (Reuters) - Two buyout firms are raising debt this week at companies they own to pay themselves dividends, using a deal structure criticized by some investors as putting short-term rewards ahead of long-term business interests.

German pharmaceuticals firm Neuraxpharm and Spanish car parking provider Empark are both looking to raise money primarily to refinance existing borrowings.

However, both are also seeking to take on additional debt to pay dividends to their private equity owners, according to sources familiar with the matter.

So-called “dividend recapitalisations” are often seen as a signal of a peak in bond markets, as well as a trough in the market for stock market fundraisings, as private equity firms often use them in lieu of an initial public offering (IPO).

Critics say that, by doing dividend recaps, buyout firms are piling more debt on their companies to pay themselves.

Defenders argue this is little different from any other dividend payout, which also siphons off funds that could have been used for the company’s benefit.

Neuraxpharm has secured a 541 million euro ($600 million) private loan arranged by BNP Paribas, according to a document seen by Reuters.

About 90 million euros of that will go towards paying dividends to owner Apax Partners, according to a source familiar with the matter.

The owner had received some buying interest but opted to hold the company instead, and added the dividend recap element to help meet its return targets, the source said.

“It makes sense to hold on to a profitable company rather than exit just yet, particularly as company has further potential to grow,” said the source.

A spokesman for Apax declined to comment.

Empark has launched investor roadshows this week ahead of a potential issue of eight-year and seven-year bonds to raise 575 million euros, according to an investor memo seen by Reuters.

The proceeds of the issue, led by JP Morgan and Barclays, will be used to refinance an existing 475 million euro facility, to pay transaction costs and for a distribution to shareholders, the message stated.

About 92 million euros will go towards paying a dividend to owner Macquarie Infrastructure and Real Assets (MIRA), said a second source familiar with the matter.

“We are merely returning leverage to where it was at time of leveraged buyout (6.9x) and the company has been levered higher in the past pre-MIRA – so this is a fairly sensible dividend,” said the source.

A second source familiar with the deal stressed that the dividend recap element of the transaction was only a small portion. “It is incremental rather than transformational, and therefore there is healthy investor appetite for these deals.”

MIRA declined to comment.

A string of deals priced in 2019 with a dividend recap portion, prompting some analysts to suggest that the European bond market was overheating and could be heading for a fall.

Reporting by Abhinav Ramnarayan, editing by Sinead Cruise, Mark Potter and Alexandra Hudson

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