High-yield issuers are planning to sell more dividend deals in the coming weeks, according to bankers, who note that investors are willing to gobble up the higher-yielding instruments despite the obvious drawbacks.
Originators at bulge-bracket firms say successful offerings will be those that come from issuers with seasoned debt outstanding, as opposed to companies that have issued debt more recently. The bankers declined to name pending sales.
Earlier this month, medical staffing concern Team Health sold $180 million in 9% notes. David Jones, cfo, says the sale helped pay three original equity sponsors of the company who have since provided additional capital. "This was not a quick flip from a holding company," he states. Jones could not quantify how much of the pricing may have been influenced by the use of the proceeds.
In dividend deals, a portion of the proceeds are used to pay off a borrower's equity investors. This is seen as detrimental to bondholders since the proceeds are not being used to further the company's ability to pay back its debts. However, the dramatic tightening in corporate spreads has left some investors willing to participate in dividend deals because they offer yields that compensate for their downside.
Roughly 10 notable dividend deals have been sold this year, including large ones from Dex Media, United Agri Products and American Real Estate Partners, as well as more recent ones from WH Holdings and American Rock Salt, which both paid a 9.5% coupon to attract investors. The American Rock Salt deal was the company's first offering; Gunther Buerman, chairman of the board, said it was conducted partly as a way for its shareholders to receive a return on capital while still staying invested.
That the sales are getting done at all is indicative of a hot market with a lot of cash on the sidelines, since most traditional investors scoff at the notion of buying them. Margie Patel, high-yield portfolio manager at Pioneer Investments in Boston, and Ho Wang, portfolio manager at Muzinich & Co., say they do not participate in dividend deals. Wang notes that if an equity sponsor is cashing out that should raise a red flag for long-term, total return investors. They add, however, the high coupons associated with these riskier offerings are apparently too tempting for other managers to pass up.
From the sell-side and issuer perspectives, dividend deals are a no-brainer. "If I could do one, I would do as many as I can as fast as I can," says Jon Budish, a senior high yield-trader at Jefferies & Co. The firm underwrote the American Rock Salt sale.
