More on Dividends

Last week we covered dividend recapitalizations on sponsored leverage loans. Turns out the topic required more air time, based on the feedback we received from readers.

One of the top investment bankers in the middle market reflected on the differences lenders perceive among recaps opportunities. “A primary consideration is the vintage of the fund for the company being recapped,” he said.

The theory is that if the portfolio company is in an earlier fund that has little capital left, many lenders will be cautious to provide a large dividend. Sponsors often have limitations on investing across funds, so they can’t put new money into old funds. That means if the borrower struggles, the sponsor may not be able to support it.

On the other hand, our veteran advisor related, some very successful highly leveraged recaps have been accomplished for issuers only one year after the original buyout. In those cases, the new fund vintage allows lenders to feel comfortable letting cash out the door. If the company needs new capital, it’s more freely available as necessary.

Another reader shared her thoughts on how an exit strategy affects dividend policy.

“A lot depends on how the PE firm expects to realize its investment,” she said. “If the plan is to go public, it’s common to allow the