The High Yield Market Has Officially Topped, With Bondholders Eager To Cash Out Existing Equityholders In The Crappiest Of Names

Tyler Durden's picture

If the recent $750 million Clear Channel deal was not indication enough that the high yield market is now back to 2007 market top levels, the sudden resurgence of dividend recap deals should be a sufficient and necessary condition that company boards are now willing to throw any debt leverage caution to the wind and extract as much proceeds as possible during the current HY offering megaspree before the window closes with a bang. And with investors no longer even demanding any negative covenants, the rush to relever and cash out existing equity-holders will definitely end in tears. Of course, the Fed is there to backstop each and every balance sheet. If Goldman is too big to fail, bond investors will claims, so is 10x leveraged port-a-potty maker UnitedSiteServices (or so PE sponsor DLJ Merchant Banking would hope). And if there is one entity that is ecstatic with the current HY mania (in addition, of course, to equity sponsors who a year ago were staring bankruptcy in the face and are now extracting hundreds of millions on the back of gullible and potentially semi-retarded "long-onlies"), it is Wall Street banks, which have perfected the art of finding retarded idiot investors (in exchange for a meager 3% fee) who are happy to ignore the whited-out "Use Of Proceeds - dividend payment to existing equity" and throw their LPs' money down said port-a-potty.

Some of the deals that have caught our eye recently, which absent the Fed keeping rates at 0 for as long as Goldman Sachs says so, would never in a million years have happened, are the following:

  • Booz Allen Hamilton $350 million dividend recap launched on December 1. Use of proceeds: $550 million dividend recap to sponsor Carlyle and seller note reduction by $100 million (yes, the math does not work out, which is why Booz Allen will use $300 million of existing cash). Net result: pro forma total leverage of 5.0x, but at least Carlyle will be happy. The new bondholders? Well, we will follow up on them in one year. Underwriter: Credit Suisse
  • Green Tree Credit Solutions $380 million dividend recap loan launched December 1. Use of proceeds: $150 million to troubled auto-focused PE firm Centerbridge which burned so much cash in the recent round of auto bankruptcies it is a miracle the firm is still around. The firm is a, wait for it, mortgage loan processor... that's right. the semi-retarded monkeys did not even read the company description. We wish the dividend recap deal "investors" all the best as they add to the 20% actual unemployment rate real soon. Sole underwriter: Deutsche Bank, which yesterday was furiously trying to get more people involved by lowering the OID to 96 from 97, and the spread to L+575 from L+500.
  • Goodman Global $320 million dividend recap bond launched December 8. Use of proceeds: $115 million to PE firm Hellman & Friedman. Notes are expected to price December 11, with Barclays and JPM looking and finding eager semi-retarded monkeys-cum-investors.
  • Quintiles Transnational $525 million dividend recap senior notes sold December 7. The chimps involved in the deal actually increased the original amount that they will never recover from $400 million by $125 million. Use of proceeds: $275 million to sponsors Bain Capital and TPG Group. Morgan Stanley and Citi are joint bookrunners. 
  • Taco Bell franchiser K-Mac $110 million dividend recap loan done December 2. Use of proceeds: $59 million to Olympus Partners. K-Mac is a big
    Taco Bell franchisee, operating 130 of the brand's restaurants, and
    pulling in roughly $250 million in annual revenue. The chimps like. Underwriters: Bank of America and Wells Fargo.

All of these deals follow in the footsteps of the Transdigm deal that set off the dividend recap races way back in October.

The last time we had a comparable surge in dividend recaps was around the later summer of 2007, about the same time that the S&P was seeing its all time ever highs. Here is to no deja vu's all over again, although we seriously doubt it.

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yy's picture

Nice post TD, essentially the point is that regardless of where interest rates are  (obviously 2009 and 2007 have nothing in common) the ability to force savers to choose self-destructive paths is unchanged.

It is fascinating indeed, I beg for an explanation- other than the people who have actual vested interests must be not involved in these transactions, just absentee owners... But who are they?!

Anonymous's picture

I'm looking for the member greensharts.

Green Sharts's picture


If somebody had told me at the beginning of this year that junk spreads to treasuries would be below where they were pre-Lehman and private equity would be doing dividend recap bond issues I would have never believed it.  People have short memories.  There is so much cash flowing into junk bonds that the fund managers will apparently buy any new issue.  As they say on Wall Street, when the ducks quack, feed them.

rico sauve's picture

Hmmm... sounds familiar. What happens when we run out of food, GreenSharts?

Anonymous's picture

...they are pensions, endowments, and other so called sophisticated investors that don't have a clue what they own or what their hedge fund and PE allocations are doing.

All they see is +45% YTD numbers via their HFs (which is coincidentally the return on any HY index) and wait-and-see-take-us-to-the-promised land IRRs for PE. Remember, dividend recaps serve to add an early cash flow to the IRR equation for PEs and their LPs. LPs don't understand either finance or math enough to know that as Houdini Howard Marks once quiped, 'you can't eat IRR'.

Anonymous's picture

Sounds like somebody is upset that they missed some fantastic gains in the HY arena this year....

jm's picture

Missing out on HY in this melt-up is my single greatest regret.

I do wonder if seeds are being sown for some industrial grade HY revulsion.

It's all about the yield in the end.   

GoldSilverDoc's picture

Could somebody PULEEZE send me to the right place - I only need around $100MM or so, and I have identified some absolutely EXCELLENT land, prudently and judiciously selected in Argentina, Paraguay, northern Mexico, and other locations, which needs to be bought, then cleared, then planted with soybeans.  And grapes.  I will be glad to send along my telephone number if I am going to get a call from the Squid telling me when we can close this deal.

Chopshop's picture

best of luck, GoldSilverDoc ... but i think that window has long-since closed.

if you can find someone willing to float you that loan then hat's way the f' off. current climate even with fungible collateral is still very cold to such alternate funding / emerging companies / vc. plus you're biz is very correlated so, sorry, but doubt it'll fly. wish you the very best, fwiw.


great piece, TD. thanks for it.

spekulatn's picture

Could somebody PULEEZE send me to the right place - I only need around $100MM or so,


 Washington,D.C. homey.

Just tell those d-bags its for climate change. 

Mission Accomplished.

Your welcome.

Cursive's picture

Dividend recapture is nothing but the used condom from a Private Equity prison rape of a good company.  Let's tally the losers here.  First, the employees of a once solid company get screwed because the PE boys couldn't sell a butane lighter to a meth head.  Second, some high-yield seeking clown gets screwed buying into this now worthless company.  Please tell me that the FR is not buying this paper.  Please.

darkpool2's picture

That's why we shouldn't do the audit. Wouldn't want to spoil anyones nice supper.

Anonymous's picture

Clear Channel? They're still in business?

Anonymous's picture

It's no excuse, but by way of an explanation, the massive inflows to bond-oriented mutual funds is worth examining here. There is simply a lot of demand for new paper. Yield hunger is extreme. But TD is correvt: it will end in tears.

And he forgot to mention the new CLOs floated last week.....


Anonymous's picture

Does anyone know who the buyers of these are? Are these second tier bond fund managers?