Bondholders suffer as buyout firms gorge on dividends
After Weetabix, the maker of Britain’s best-selling breakfast cereal, fired 7% of its workers and cancelled the employee bus service to free up cash for debt from a leveraged buyout, the Kettering, England-based company, borrowed £130m ($249 milli...
By Agencies |
LONDON: After Weetabix, the maker of Britain’s best-selling breakfast cereal, fired 7% of its workers and cancelled the employee bus service to free up cash for debt from a leveraged buyout, the Kettering, England-based company, borrowed £130m ($249 million) so it could enrich owner Lion Capital.
Bondholders worldwide are suffering a double whammy as more than 80 companies controlled by LBO firms have borrowed at the expense of workers and debt investors just so they can pay themselves dividends, according to data compiled by Bloomberg and Standard & Poor’s.
“We don’t like it,” said Andrew Wilmont of Axa Investment Managers in London. “The more you leverage up the company, the less the company has to fall back on if things turn bad.”
Firms like Blackstone Group and Kohlberg Kravis Roberts completed $269bn of LBOs this year by borrowing at least $166bn in loans and bonds, according to Bloomberg and Lehman Brothers Holdings data.
Companies owned by the LBO groups sold an additional $30bn of debt this year for dividends, said S&P. LBO firms, which typically borrow two-thirds of the money they pay for acquisitions, used to wait three to five years before profiting from selling shares in their companies.
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The debt of companies owned by buyout firms has risen to the equivalent to 5.4 times their cash flow, the most ever, S&P says. Debt rated below BBB- by S&P and Baa3 by Moody’s Investors Service is considered non-investment grade, or junk. Payouts to buyout firms were partly to blame for the lagging performance of bonds sold by Hertz, Brake Bros and Impress Holdings. Their bonds trailed the 8% average return this year for securities with junk ratings, costing holders about $70m total, according to US indexes compiled by Merrill Lynch.
Hertz pummelled bondholders after the rental-car company said in September ’05 it was being acquired for $15bn. Its $175m of 7.62% notes due in ’12 lost as much as 10% of their face value. S&P cut the ratings on the Park Ridge, New Jersey-based company to BB- from BBB-.
Just six months after the buyout, Hertz used a $1bn loan to pay a dividend to its new owners, Clayton Dubilier & Rice, Merrill Lynch and Carlyle Group, and S&P threatened another ratings downgrade. Hertz’s $1.8bn of 8.88% bonds due in ’14 yield 334 basis points more than similar-maturity Treasuries, 5 basis points more than before the dividend. A basis point is 0.01 percentage point.
The price of the bonds has risen 1.9% in the past two months. That’s less than half the 5.3% average increase for debt with BB ratings in the same period, according to Merrill. Investors holding Hertz’s $3.3bn of bonds would have made $60m more by investing in a Merrill index of similarly rated bonds.
The company plans to reduce debt and pay its owners another dividend, this time $427m, when it raises as much as $1.83bn in an initial public offering, Hertz said last week in a filing with the US Securities and Exchange Commission.
“Any time you replace equity with debt, that’s bad for the credit,” said Steven Bavaria, head of loan and recovery ratings at S&P in New York. “You’re bound to see an increase in the risk of default.”
A slower economy may boost yield premiums on companies owned by leveraged buyout firms by more than 2 percentage points, said Michael Anderson, a high-yield strategist at Lehman Brothers in New York. Last week the US government said third-quarter growth slipped to 1.6%, the lowest in three years.
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