At the time, most banks weren’t willing to fund that sort of deal, called a “dividend recapitalisation.” So KKR’s capital markets arm did it itself.
The result was $ 325 million loan for insurance claims processor Sedgwick Claims Management Services that paid off for KKR three times over: The firm got a fee for arranging the loan, its share of a $ 375 million dividend payment from Sedgwick and a revived market for dividend recaps.
Even in a world of financial engineering, the deal stood out. It contributed to better-than-expected second-quarter earnings KKR reported Tuesday and illustrated the myriad ways private equity firms can juice returns in an era of sluggish economic growth.
“Our capital markets business allows us to access equity and debt capital directly to get deals done when others can’t,” Scott Nuttall, the head of KKR’s global capital and asset management group, said on a conference call in February.
KKR and other buyout firms have argued that expanding into credit, real estate and other businesses has made them more stable, sheltering investors from quarterly swings in the value of their private equity holdings. This latest deal shows that the advantage extends even further, helping firms get deals done when markets aren’t cooperating.
The Sedgwick deal was the first dividend recapitalisation of more than $ 100 million since November 2015, according to Morgan Stanley. The market for such transactions came to a halt late last year during a volatile stretch in the credit markets.
Private equity firms’ portfolio companies routinely take on debt to fund payouts to their owners, but these financings aren’t often arranged by the owners themselves.
Dividend-recap deals have come under fire in the past because they layer more debt on a company to fund a payout to a company’s owners. But ultralow interest rates have softened the impact of such transactions on issuers’ balance sheets. Moody’s Investors Service said the Sedgwick loan would weaken the company’s credit profile but not enough to affect its credit rating.
KKR’s capital markets arm “led the market, ripping off a major Band-Aid” by reopening the window for dividend-recap deals, Morgan Stanley leveraged finance executives wrote in an April note to clients reviewed by The Wall Street Journal.
Morgan Stanley competes with KKR’s capital markets business, which still plays a marginal role in overall debt and equity underwriting. So far this year, KKR ranks 86th among underwriters of US debt and 18th among equity arrangers, according to data provider Dealogic.
But KKR executives have said its ability to underwrite debt and equity gives it a leg up in deal making. Last year, the firm arranged $ 815 million in financing for its acquisition of Midwest retailer Mills Fleet Farm, which helped it clinch the deal even as banks backed away from rocky credit-market conditions.
The firm’s capital markets arm often plays a role when KKR takes its companies public. The firm was an underwriter on the May initial public offering of US Foods Holding, a food distributor KKR and fellow private equity firm Clayton Dubilier & Rice took private in 2007. The work earns it a cut of fees on the offerings, which also allow its private equity arm to begin selling down its investment.
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This article was first published by The Wall Street Journal