Private-equity firms from Bain Capital to Onex Corp. are raising loans through companies they own to pay themselves dividends at a pace that exceeds even the frothy days leading to the worst financial crisis since the Great Depression.
Borrowers controlled by buyout firms are on pace to raise more than $11.5 billion this month through dividend deals, a record and up from $3.6 billion in April, according to Standard & Poor’s Capital IQ Leveraged Commentary & Data. Beats Electronics LLC, the headphone maker founded by rapper Dr. Dre and Geffen A&M Chairman Jimmy Iovine, is meeting lenders tomorrow to seek $700 million in such loans, according to people familiar with the situation who declined to be identified.
Elsewhere in credit markets, a gauge of U.S. corporate credit risk declined the most in more than three weeks as consumer confidence rose in May to the highest level since February 2008. The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, dropped 2.5 basis points to a mid-price of 73.3 basis points at 11:28 a.m. in New York, according to prices compiled by Bloomberg. The measure fell by as much as 3.1 basis points, the biggest intraday decline since May 3.
Dividend transactions, which fund payouts to owners and increase leverage without enlarging the asset base supporting the debt, “weaken credit quality,” Moody’s analysts led by David Keisman in New York wrote in a May 1 report.