For Some Companies, Debt Downgrades Followed Payouts to Private-Equity Owners

The postpandemic period was a golden age for dividend recapitalizations, a type of transaction in which a company borrows money to pay a special dividend to its private-equity owners.
The postpandemic period was a golden age for dividend recapitalizations, a type of transaction in which a company borrows money to pay a special dividend to its private-equity owners.


  • A postpandemic binge in dividend payments from companies to their private-equity owners undermined credit quality for some

Private-equity firms took advantage of loose credit markets two years ago to extract record amounts of cash from companies they control. Now some of these companies are paying the price.

The postpandemic period was a golden age for dividend recapitalizations, a type of transaction in which a company borrows money to pay a special dividend to its private-equity owners. In 2020 and 2021, with interest rates hovering near zero, U.S. companies borrowed nearly $177 billion for these transactions, a record sum, according to credit-ratings company Fitch Group.

Some of the companies that borrowed to pay these dividends subsequently had their credit downgraded, a reflection of the hangover afflicting private equity as more than a decade of easy money dries up and companies face sharply higher debt costs.

Debt from dividend recaps has added to the credit challenges some companies now face as interest rates climb. Of the 20 largest debt issuances tied to dividend recaps from 2020 and 2021, four of the issuing companies, including cable company Astound Broadband and building-materials company SRS Distribution, later had their debt downgraded by bond-ratings provider Moody’s Investors Service. Two others were downgraded the year before the dividend payments.

Christina Padgett, head of leveraged finance research and analytics at Moody’s, said dividend recaps done during the postpandemic boom years add to the debt burdens of some companies.

These dividends “may not have been bad for the private-equity sponsor in terms of generating returns, but they certainly weaken the issuers," she said.

Businesses owned by buyout firms typically have higher leverage levels than other companies, and typically rely on low-rated junk bonds or floating-rate leveraged loans. As the Federal Reserve began raising interest rates in March 2022, private equity-owned companies have on the whole seen their credit conditions decline more sharply than other businesses.

Of the 20 rated companies that defaulted in the first quarter of the year, nine had private-equity owners, Moody’s said. As of early May, more than 80% of highly speculative debt was backed by private equity, the company said.

Dividend recaps have long been a controversial tool for private-equity firms to generate returns for themselves and their fund investors. Buyout firms love the technique because it lets them collect some profit before they are ready to sell a company, essentially cashing in some chips before a bet pays off, or doesn’t.

The American Investment Council, private equity’s main lobbying group, said in 2021 that dividend recaps benefit fund investors, helping pensions meet their obligations to teachers and other public servants. The Washington, D.C.-based group said that typically only healthy companies that can bear extra debt do dividend recaps. It pointed to S&P Global’s 2012 research showing a lower default rate for debt used for dividend recaps than for debt used for other purposes.

Critics of dividend recaps see them as a technique for a company’s owners to extract wealth at the expense of its lenders and employees. These critics often point to companies that paid big dividends and later ran into serious debt troubles.

Examples of such companies include Millennium Health, which sent more than $1.6 billion in debt-fueled payouts to its owners, including Boston firm TA Associates, before entering bankruptcy in 2015, and Serta Simmons Bedding, a mattress maker owned by Advent International, which paid a $670 million dividend in 2016. TA and Advent declined to comment.

Dividend recap volume typically ebbs and flows with debt markets. So in 2020, when lawmakers and the Fed flooded the economy with liquidity in response to the pandemic, dividend recaps became available for a much wider range of companies than usual, according to people who work on the deals.

Record-high borrowing for dividend recaps in 2020 and 2021 shrank to a trickle after debt markets started tightening last year. U.S. companies have issued just $7.6 billion of the debt in the past five quarters combined, Fitch data show.

But dividend-recap debt from the boom years lingers on to affect the health of some companies.

In late April, Moody’s downgraded Radiate Holdco’s debt, saying the cable company—which operates as Astound Broadband—has high leverage and an unsustainable financial structure. It said Radiate is at risk of a distressed-debt exchange, a transaction in which a company swaps out its old debt for new loans or cash, a technique often used by private-equity owners as a means of preserving their equity ownership.

In September 2020, Radiate sent a $650 million dividend recap to its then-owner, TPG Capital, and other shareholders, according to Fitch data. TPG sold Radiate two months later to Stonepeak Infrastructure Partners. Stonepeak hasn’t extracted dividends from Radiate, according to public records.

Both Stonepeak and TPG declined to comment while Radiate didn’t reply to requests for comment.

Despite the credit downgrade, Moody’s said Radiate has a large and diverse customer base, valuable assets, stable profitability and a high profit margin.

Moody’s also downgraded its ratings for building-products distributor SRS Distribution—owned by Los Angeles firm Leonard Green & Partners—in August 2022, more than a year after it paid out a dividend of more than $1 billion. However, Moody’s maintained a stable outlook on the company’s debt and said it had “tremendous financial flexibility."

Leonard Green declined to comment and SRS didn’t reply to a request for comment.

Another company that faced a credit downgrade following a boom-era dividend recap: Lawn-care business TruGreen, which is owned by New York firm Clayton Dubilier & Rice. The company paid its owners a $349 million dividend in late 2020 as part of a debt refinancing, Fitch data shows.

Last year, Moody’s downgraded TruGreen debt, citing the company’s high leverage, weakening consumer demand and rising costs, though the ratings company left its outlook for the debt as stable. Clayton Dubilier declined to comment and TruGreen didn’t respond to a request for comment.

Moody’s also downgraded debt issued by home-healthcare provider National Mentor, which operates under the Sevita brand, last September, citing wage inflation and the company’s aggressive use of debt for acquisitions and for paying dividends. Early in the previous year, National Mentor sent a $375 million dividend to its owners, who include private-equity firm Centerbridge Partners, as part of a debt refinancing, Fitch data show.

Centerbridge declined to comment. Sevita didn’t reply to a request for comment. A Sevita earnings presentation dated May 30 showed that its revenue has risen by 16% and its profitability by 4% over the previous 12 months.

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