Hot European debt markets are giving US private equity firm Hellman & Friedman a historic salary, with cheap borrowing costs giving a rotten listed security firm access to more money to pay into its owners a dividend of 1.6 billion euros.
Much of Europe is struggling to tackle a winter wave of coronavirus and further lockdowns, but corporate debt markets have remained largely unfazed as central bank stimulus measures push investors to seek yield in the riskier end of the credit spectrum.
Swedish company Verisure took advantage of this rush of investors to raise 4.4 billion euros in new bonds and new loans. The deal will refinance existing debt and fund the large payment, which will benefit majority shareholder Hellman & Friedman and other owners, including Singapore sovereign wealth fund GIC. It will mark one of the largest in Europe ”dividend recapitalizationsWhere companies go into more debt to return money to their owners.
“It’s huge,” said a bond fund manager. “The owners have been pretty transparent that they’re going to take whatever dividends they can get.”
Verisure, which installs home alarm systems, on Friday concluded the € 2.5 billion high yield bond portion of its deal, using strong demand to increase the size by € 53 million, which the company said it could use it to increase payment to its shareholders. .
Companies classified as high yielding or undesirable are seen as riskier than their high-grade counterparts, but investors are increasingly drawn to riskier transactions. “We are at a record level of negative yielding assets, which encourages investors to go for credit [and] look further down the credit spectrum, ”said Andrey Kuznetsov, senior portfolio manager at Federated Hermes.
Verisure also raised € 2 billion in new leveraged loans under the deal, while last week it also gained approval from its existing lenders to ease terms that would limit a payment too. heavy. The dividend to owners is expected to be paid in the first quarter of 2021.
In December, the Californian buyout group Hellman & Friedman has sold Verisure, by transferring an almost 60% stake in the company from one fund to another, a practice that has gained ground among private equity firms.
The latest dividend means Verisure will have paid out at least $ 3 billion to its owners since Hellman & Friedman took over the company in 2015. The latest debt deal will multiply the company’s debt by 7 times, even using Verisure’s favorite sharply adjusted profit number, at a time when the European Central Bank becomes more and more concerned on these highly leveraged transactions.
“Investors always need income,” said Vivek Bommi, senior portfolio manager at Neuberger Berman. “When the market is open, that’s when [companies can bring a deal] where you are a little more aggressive when it comes to leverage. “
The high yield bonds sold last Friday included € 1.3 billion in debt equivalent with ratings in the triple C range, the lowest part of the junk debt market that rating agencies deem highly speculative . This tranche of debt, which is not guaranteed on any asset, offered investors a 5.25% coupon, significantly lower than the 7.8% yield of a European bond index with a similar rating.
Verisure’s latest deal marks the third time in just over four years that the company has taken on new debt to return money to its owners. Debt markets remained comfortable funding the firm’s good payments, as Verisure has a habit of reducing debt quickly.
Hellman & Friedman’s sale of Verisure from one of its private equity funds to another values the company at 14 billion euros. The company has taken advantage of the signing of contracts with clients for the maintenance of their alarms once installed, creating a very attractive source of recurring income for private equity investors.
“They’ve exploited the subscription model heavily,” said a person familiar with the deal, adding that the business “is growing like a weed.”