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Record dividend payments from junk loan sales

US companies sold a record amount of junk-rated loans this year to raise dividends, supported by economic recovery and investors’ demand for high-yielding assets.

According to LCD of S & P Global Market Intelligence, insurance company Asurion LLC and fast food chain Whataburger Inc. Non-financial firms such as have issued over $ 72 billion in speculative grade loans to pay dividends in 2021. This is an annual record of data dating back to 2000, surpassing 2013’s record high of $ 54.4 billion.

According to analysts, the record shows that businesses are getting used to cash-packed balance sheets and economic trajectory. Leveraged drones are usually issued by companies that have a large amount of debt relative to their earnings, making them more sensitive to the trajectory of the economy.

Economists are now raising growth forecasts for next year, suggesting that supply chain disruptions and Covid-19 Delta variants are slowing spending and production recovery. This helps offset the consequences of issuing debt to raise dividends. This can put pressure on a company’s credit rating and borrowing capacity as the funds are not used for business.

US companies also issued a record amount of junk bonds this year, but leveraged loan sales are moving faster than the 2017 record of $ 503 billion. Many companies sell junk bonds, thanks to strong demand from investors seeking high-yield bonds, after the federal reserves have cut interest rates to near zero and started buying billions of dollars worth of bonds. This has helped reduce interest rate costs and raise record amounts of cash. yield.

Some companies are beginning to pass on or spend the money on their shareholders. In addition to dividends, more than $ 294 billion of junk-rated loans have been sold to finance mergers and acquisitions, surpassing the historical record of approximately $ 275 billion since 2018. Analysts and investors will see companies selling junk bonds in the coming months.

Anders Persson, Chief Investment Officer for Nuveen’s Global Fixed Income, said: “I think these transactions will be reduced and more and more focus will be placed on M & A opportunities and dividends.”

One of the main beneficiaries of the boom is private equity. Private equity firm-owned companies have sold over $ 60 billion in leveraged loans to pay dividends. This is also a record of 21 years.

Dividend payments can bring additional cash and one-time revenue gains to private equity firms. They also help pay the investors of the company who donated the money to buy the company. The group usually includes university funds and pension funds, among other institutions.

Dividend payments reward private-equity investors as these companies seek new leveraged buyouts. Due to the low yields of traditional fixed income assets, many investors went to private equity funds and other alternative asset managers to get higher returns. Meanwhile, the average LBO price this year is rising and more cash needs to be prepaid from buyers.

The largest purchaser of junk-rated loans is secured loan debt, which packages debt into securities. CLO sales have exceeded this year’s record of $ 124 billion, and analysts expect CLO to continue to rise until the end of the year, providing stable demand for new loans.

Funds holding leveraged loans usually involve payments that rise with interest rates, helping investors to hedge fixed rate bond holdings from federal growth and unexpected inflation that undermine fixed rate fixed payments. increase. Head of Investment at Wasserstein Debt Opportunities.

“Investors are increasingly allocating to leveraged drones,” he said. “Demand for junk debt is above all records.”

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Strong demand from investors has pushed leveraged loan yields to new lows, allowing borrowers to raise more debt at lower interest rate costs. The average maturity yield on S & P / LSTA index loans fell to a record low of 4.2% in late September.

Earlier this year, Asurion, an insurance company for personal technology devices such as mobile phones and tablets, sold $ 3.3 billion worth of loans rated as Single B Plus and Single B to cover dividends to owners. bottom. Moody’s Investors Services reported that the loan raised the company’s total debt to more than six times its interest, taxes, depreciation and pre-amortization revenue.

Last month, Autokiniton US Holdings Inc., a parts supplier in the automotive industry owned by KPS Capital Partners, sold a $ 375 million loan by 2028 to finance shareholder dividends. Large-scale demand from investors has allowed the company to scale up its loans rated as Single B.

Three-quarters of loans sold in 2021 have a single B credit rating. Despite the large number of transactions, the average yield of newly issued single B-rated corporate debt this year is around 4.8%. According to a recent report from S & P Global Ratings, this is below the average yield of 5.9% over the last decade, suggesting that investors are not well paid for the additional risk they are taking. ..

Given the Fed’s support and economic growth, Parson said his company is willing to raise loan yields a bit, but continues to pay attention to company choices.

“We are very much paying attention to the poor quality trends towards new loan issuance, which, in our view, is growing a bit,” he said. “This makes credit selection more important than ever.”

Write to Sebastian Pellejero at sebastian.pellejero@wsj.com

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Record dividend payments from junk loan sales

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