Private equity groups are paying themselves and their investors by getting the European firms they own to raise cash by issuing debt in volumes not seen since before the financial crisis. This is common when the economy is healthy because companies can use profits to meet repayments but is controversial at a time when the economic environment in Europe is poor.
Some European companies have even started issuing high-risk bonds known as payment-in-kind, or PIK notes to pay dividends to their private equity backers. They allow borrowers to defer interest payments, creating a major problem if they cannot repay in full when the bonds are due.
The practice, known as dividend recapitalisation, has been widespread in the United States but data shows it has now taken off in Europe because debt markets are liquid and private equity groups have been unable to raise cash in more traditional ways, for example by selling stakes in a company.
"Given the state of the market, it's inevitable a few more will get done."
According to S&P Leveraged Commentary and Data, private equity owners have extracted 2.3 billion euros from their European businesses in the first quarter of 2013 through high-yield bonds and loans.
Dividend recapitalisation volumes this year are on track to match the 10 billion euros seen on the eve of the financial crisis in 2007, the S&P data shows, and compare with just 1.9 billion euros for 2012 and 800 million euros in 2011.
Firms to have made dividend recaps in 2013 include Advent and Bain's WorldPay, KKR's Pets at Home and Blackstone's Spanish metal packaging firm Mivisa.
Bridgepoint has also said it wants to raise additional debt for its German chemicals maker CABB and banking sources told Reuters LPC last week this would be used partly to fund a dividend payment. Shopping firm Global Blue's owner Silver Lake is among others mulling a dividend recap.
Orange Switzerland, owned by Apax Partners, and CVC Capital Partners-owned Sunrise Communications have issued euro-denominated PIK notes this year, to pay their private equity backers, and more are expected to follow.
Existing company bondholders and bankers dislike dividend recapitalisations because it adds to a firm's debt and reduces the private equity group's exposure.
PIKs are particularly controversial, even when used to raise general company debt rather than to pay private equity owners. For example, they contributed to the collapse of British clothing chain Peacocks last year.
Using the debt markets for dividend recapitalisations is more common in the United States, where volumes hit $41.9 billion last year. High-yield bond markets are deeper and more developed in the US, and investors there have been hungry for the better returns high-yield and PIK notes offer over standard bonds.
Loading companies with more, and riskier, debt is likely to spark criticism of the private equity industry if firms get into financial difficulties in future. But buyout houses will likely push ahead with recaps as long as the mergers and acquisitions and initial public offering markets remain shut.
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