Combine the expiration of Bush tax cuts with today’s bond mania and here’s what you get — junk debt issued by less-than-stable companies, just to pay out dividends.
According to Bloomberg, speculative-grade companies are issuing debt at the fastest pace since the crisis, not to invest in business expansion, but to deliver their private equity owners a cut of dividends before dividend taxes potentially increase next year.
A bond buyer should naturally be cautious when a company tells him that they are taking a loan from him in order for its owners to partially cash out, but in today’s yield hungry world, it’s not stopping a flood of junk issues for just this purpose:
Banks arranged or started marketing $8.77 billion of high- risk, high-yield loans slated for shareholder payouts this quarter, bringing 2010’s total to $17.1 billion, more than five times the amount of the past two years combined, according to Standard & Poor’s Leveraged Commentary and Data.
Private-equity firms, facing a jump in taxes on capital gains next year and a slumping market for initial public offerings, are saddling their companies with more debt as the U.S. economic recovery slows. Last week, landscaping company Brickman Group Holdings Inc., which is owned by Los Angeles- based Leonard Green & Partners LP, started raising $550 million of loans to refinance debt and pay a dividend.
“We’re going to see record-breaking transactions as the fourth quarter rolls in,” said Robert Willens, president of Robert Willens LLC, who previously was a managing director in charge of tax and accounting analysis at Lehman Brothers Holdings Inc. “Companies are in the process of setting up dividend programs now so that they can get them implemented by the end of the year.”
Who needs an IPO to cash out, when you can sell investors loans for puny interest? This is another example of how Only Fools IPO These Days Since Selling Junk Bonds To Investors Is So Easy >