Record dividend payments on unwanted loan sales

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U.S. companies have sold a record amount of rotten classified loans this year to boost their dividends, supported by the economic recovery and investor demand for high-yielding assets.

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

Analysts say the record shows companies are getting used to cash-filled balance sheets and economic trajectory. Leverage drones are typically issued by companies that are heavily leveraged against their profits, 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 resuming production. This compensates for the consequences of issuing debt to increase dividends. This can put pressure on a business’s credit rating and borrowing capacity because the funds are not used for business purposes.

U.S. companies have also issued a record amount of junk bonds this year, but sales of leveraged loans are growing faster than the 2017 record of $ 503 billion. Many companies are selling junk bonds, thanks to strong demand from investors looking for high yield bonds, after Federal Reserves cut interest rates near zero and started buying billions of dollars in ‘obligations. This has reduced interest rate costs and raised record liquidity. yield.

Some companies are starting to pass on or spend money on their shareholders. In addition to dividends, more than $ 294 billion in rotten listed loans have been sold to fund mergers and acquisitions, breaking the all-time high of around $ 275 billion since 2018. Analysts and investors will see companies selling bonds rotten in the months to come.

Anders Persson, chief investment officer for Nuveen’s Global Fixed Income, said: “I think these deals will be reduced and the focus will be more and more on M&A opportunities and dividends.

One of the main beneficiaries of the boom is private equity. Companies owned by private equity firms have sold more than $ 60 billion in leveraged loans to pay dividends. It’s also a 21-year record.

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

Dividend payments reward private equity investors as these companies seek new debt buyouts. Due to the low returns on traditional fixed income assets, many investors have turned to private equity funds and other alternative asset managers for higher returns. Meanwhile, the average LBO price this year is on the rise and more cash has to be prepaid by buyers.

The biggest buyer of badly rated loans is secured loan debt, which groups debt into securities. CLO sales topped this year’s record $ 124 billion, and analysts expect the CLO to continue rising through the end of the year, ensuring stable demand for new loans.

Funds holding leveraged loans typically involve payments that rise with interest rates, helping investors protect fixed-rate bond holdings against federal growth and unexpected inflation that undermine fixed-rate fixed payments. . to augment. Head of Investments at Wasserstein Debt Opportunities.

“Investors are increasingly investing in leveraged drones,” he said. “Bad debt demand is above all records. “

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Strong investor demand has pushed yields on leveraged loans to new lows, allowing borrowers to take on more debt at lower interest rates. The average yield to maturity on S & P / LSTA index loans fell to a record low of 4.2% at the end of September.

Earlier this year, Asurion, an insurance company for personal technology devices such as mobile phones and tablets, sold $ 3.3 billion in Single B Plus and Single B rated loans to cover homeowner dividends. . low. Moody’s Investors Services said the loan brought the company’s total debt to more than six times its interest, taxes, amortization and pre-amortization income.

Last month, Autokiniton US Holdings Inc., an auto parts supplier owned by KPS Capital Partners, sold a $ 375 million loan by 2028 to fund shareholder dividends. Large-scale investor demand has allowed the company to increase its Single B-rated loans.

Three-quarters of loans sold in 2021 have a single B credit rating. Despite the large number of transactions, the average yield on newly issued single corporate debt this year is around 4.8%. According to a recent report by S&P Global Ratings, this rate is lower than the average return of 5.9% over the past decade, suggesting that investors are not being paid well for the extra risk they take. ..

Given the Fed’s backing and economic growth, Parson said his company was willing to boost loan yields a bit, but continued to pay attention to corporate choices.

“We are paying great attention to shoddy new loan issuance trends, which we believe are increasing 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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