TMCnet – HIGH yield bond fund managers are becoming worried about the tendency of private equity bidders to buy a company then borrow massively in order to pay themselves large dividends.
Credit ratings agency Standard & Poor’s recently claimed that the quality of bonds was suffering through the growing use of these so-called dividend recap plans.
S&P’s Steven Bavaria warned that creditors could end up shouldering additional risk because dividend recaps essentially replaced equity with debt, which generally weakens a company’s credit rating.
Mr Bavaria also criticised banks for colluding with private equity-run companies. “Bankers eager to rake in the fees on these loans are now the ones usually financing dividend recaps,” he said.
Some fund managers are avoiding certain high yield bonds and buying bank debt direct as a less risky option. James Foster, head of fixed interest at Artemis, said bond fund managers were increasingly opting to buy into the loans from banks who package them up. “This lessens the risk for the bank, especially if the loan is large,” said Mr Foster. “While for the fund manager the loan repayment is higher up the food chain than the bond payments, should the company default.”
