European high-yield investors are bracing themselves for a flood of dividend deals as leveraged buyout sponsors take advantage of strong technicals to recoup equity investments and investors search for increasingly scarce double-digit coupons. Five or six euro-denominated dividend deals could hit the market this year, predict market participants, compared to just one last year.
Likely candidates are companies with improving earnings planning to do an initial public offering down the road, but where sponsors are eager to realize returns in the near term. Cable company Cablecom is mentioned as a possible candidate in this category. Otto Rathsman, cfo of Cablecom, did not return calls by press time. So far only Kabel Deutschland has done a euro-denominated dividend deal, breaking the ice in the asset class at the end of 2004.
Sell-siders report they are getting a lot of reverse inquiries from investors to structure dividend deals. "It's common to see recapitalizations when you have a lot of liquidity on the buy-side coupled with credit investors who want exposure to certain credits and are willing to take on more leverage," said Jim Amine, head of European leveraged finance at Credit Suisse First Boston in London.
Emphasizing that such deals make sense for some companies, Amine warned that problems arise when issuers with weaker prospects for financial improvement jump on the dividend deal bandwagon.
Investors find themselves between a rock and a hard place when it comes to finding yield. "The market is so supply-constrained there are hardly any deals to buy, and in addition it's almost impossible to get a performing credit with a double-digit yield given how spreads have tightened," commented Craig Abouchar, senior fund manager at Insight Investments in London. He said he will participate in dividend deals on a selective basis. "It's a one-way bet for the sponsors, but investors are the ones left holding the bag if things go wrong," he reflected.
While European companies such as German chemicals company Celanese have done dividend deals before (BW, 9/20), these have been dollar-denominated and targeted U.S. investors. Dividend deals are already quite commonplace in U.S., with about 25 dividend deals coming to market in 2004, over 10 of which in the first quarter alone (BW, 3/22).
Already two of the four high-yield deals this year have raised money for dividend pay-outs: German chemical company Cognis raised €530 million and Irish packaging company Jefferson Smurfit another €325 million for the purpose.
