March 5 (Bloomberg) — Companies owned by private-equity firms including TPG and Oaktree Capital Management LP have taken out more bank loans that back dividends to their owners this year than in all of 2009.
Pierre Foods Inc., controlled by Oaktree, sold a $275 million term loan on March 1 to support a $100 million payment to its shareholders. A $300 million loan for Intergraph Corp., that funded a payment to owners TPG, Hellman & Friedman LLC and JMI Equity rose in its first day of trading yesterday, according to Standard & Poor’s LCD.
Private-equity firms are seeking to benefit from resurgent demand for loans following a 64 percent rally in the debt since December 2008 as the economy has emerged from the worst recession since the 1930s. Speculative-grade U.S. companies have borrowed $1.24 billion to back payments to investors this year, almost double the total in 2009.
“Issuers are clearly taking advantage of the scarcity value of loan paper as well as investors’ desire to hold on to existing assets and their appetite for new assets,” said John Fenn, a credit market analyst at Citigroup Inc. in New York.
Junk-rated borrowers are seeking a further $2.06 billion in loans, of which about $595 million will be used to make dividend payments, according to data compiled from Deutsche Bank AG reports and S&P’s LCD.
The S&P/LSTA US Leveraged Loan 100 Index climbed 0.58 cent to 89.54 cents on the dollar this week, the largest weekly gain since Jan. 22. The debt has risen from the record low of 59.2 cents on the dollar on Dec. 17, 2008.
Banks have arranged $32.5 billion of leveraged loans this year, according to data compiled by Bloomberg, more than double the amount at this point last year. Issuance is almost a fifth of the record $152.5 billion during the same period three years ago, when banks competed to finance the biggest buyouts, Bloomberg data shows.
High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and BBB- by S&P.
Borrowing has risen as the U.S. economy reversed a yearlong contraction and grew in the last two quarters of 2009. The world’s biggest economy improved in nine of the Federal Reserve’s 12 regions in January and February while being hampered by snowstorms in the eastern U.S., the central bank said yesterday.
The number of people receiving unemployment insurance decreased to the lowest level in a year, while those getting extended benefits climbed, the Labor Department said yesterday. Initial jobless applications fell by 29,000 to 469,000 in the week ended Feb. 27, dropping from a three-month high and pointing to an improvement in the labor market.
The S&P/LSTA 100 Index has gained 1.93 percent this year, extending the record 52.2 percent return in 2009 as investors in bank loan funds have added $1.79 billion for 2010 as of yesterday, data from Deutsche Bank reports show.
Private-equity firms used proceeds from 7 percent of the $17.5 billion of loans sold to investors to pay dividends, according to data from Deutsche Bank reports. That compares with 1.7 percent of the $39 billion in loans that were syndicated to lenders last year, data from the Frankfurt-based bank shows.
“Last year, there was just a visceral reaction” against the idea of funding loans to pay private-equity sponsors dividends, said Adam Cohen, founder of debt research firm Covenant Review LLC in New York. “This year, if everyone thinks the credit is strong it won’t get dismissed out of hand.”
Ardent Health Services LLC’s lenders have until today to agree to participate in a $475 million credit facility. A $277 million portion of the debt will be distributed to shareholders including the Nashville, Tennessee-based acute-care hospital operator’s private-equity sponsor, Welsh, Carson, Anderson & Stowe.
HHI Holdings LLC, the largest independent manufacturer of forged parts and wheel bearings in North America, is seeking $380 million in bank debt. The company, owned by New York-based private-equity firm KPS Capital Partners LP and a U.S. investment unit of Mitsubishi Corp., plans to use about $178 million of the loans to pay a dividend, S&P’s LCD reported.
“It’s an alternative way for private-equity firms to monetize their investments,” said Russ Morrison, head of the U.S. high-yield team at Babson Capital. “And, it’s an opportunity for the loan market to figure out if it wants to put risk out.”
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