The coronavirus crisis has been harder on other private equity-owned companies in less defensive sectors.
Apcoa used proceeds from a loan issued in February to pay its owner, the U.S. buyout firm Centerbridge Partners, a dividend. In May, as the crisis unfolded, Stuttgart-based Apcoa moved to raise additional debt, received an equity injection and amended a covenant, after shelving plans to use state aid from the German government.
A month later, Travelodge, which previously used bond proceeds to pay interest on shareholder loans, negotiated a restructuring plan with its creditor owners Avenue Capital Group, Goldentree Asset Management and Goldman Sachs Group that allowed it to slash its rental bills.
“If dividends result in permanent increases in leverage, which makes the capital structure less sustainable, then these companies are more vulnerable,” said Kristin Yeatman, a vice president at ratings agency Moody’s Investors Service.
Representatives for Centerbridge Partners, Goldman Sachs, Avenue Capital and Goldentree Asset Management declined to comment.
Documentation governing how much additional debt private equity sponsors can raise has become increasingly permissive in recent years. This has opened the door for firms to up leverage for dividends and investment as soon as they find willing lenders, without needing permission from existing creditors. “Those types of covenants are here to stay,” Ms. Yeatman said.
Ultimately, private equity managers and their investors are drawn to dividend recaps as they provide a way to get money back, said Meziane Lasfer, professor of finance at City, University of London. “The one that is going to suffer is the portfolio company that is going to end up with a huge amount of leverage and the risk of bankruptcy.”
Source: Pension & Investments