Risk Appetite Fuels Dividends Led by Warner Chilcott
July 30, 2010, 4:10 PM EDTBy Emre Peker
(Updates with credit market comments in 14th paragraph.)
July 30 (Bloomberg) -- Warner Chilcott Plc, the Irish maker of birth-control pills, is leading companies tapping lenders to finance shareholder payouts as rising demand for leveraged loans allows companies to take on more debt.
The company said it plans to issue $2.25 billion of new senior secured term loans and unsecured debt for a $2.15 billion dividend. Airvana Inc., owned by private-equity investors including Blackstone Group LP, and Schaumburg, Illinois-based Global Brass and Copper Inc. are also seeking loans for payouts.
JPMorgan Chase & Co., Goldman Sachs Group Inc. and Bank of America Corp. are leading banks financing deals that increase companies’ debt after the S&P/LSTA US Leveraged Loan 100 Index rallied 2.25 percent in July, the most since March. Speculative- grade borrowers are taking advantage of investor demand to fund dividends before U.S. taxes on payouts jump 2.6 times and as second-quarter earnings beat analyst expectations even as growth in the economy slowed.
“Investor appetite for risk is growing and all of the horrible things of the past two years are fading from memory and we could be back in a new cycle,” said Robert Willens, president of Robert Willens LLC. “Companies are a little more sanguine about the business outlook and they feel that replacing equity with debt is a prudent thing to do.”
Taxes on dividends are slated to jump to 39.6 percent next year from the current rate of 15 percent, which was adopted in 2003 by former-President George W. Bush and a Republican- controlled Congress. President Barack Obama’s budget, sent to Congress Feb. 26, would limit the increase to 20 percent.
‘Last Bite’
“Right from the beginning of the year we were expecting a flurry of special dividends in the second half of the year to take advantage of this last bite at the apple on the lower rates,” said Willens, who previously was a managing director in charge of tax and accounting analysis at Lehman Brothers Holdings Inc.
So-called dividend deals, which permeated debt markets in 2006 and 2007 before the credit seizure, accelerated at the beginning of the year. Companies ceased issuing debt for shareholder payouts after April amid investor concern that Europe’s debt crisis, dropping U.S. consumer confidence and uncertainty over the future of financial regulation might derail the economic recovery.
Gross domestic product in the world’s largest economy grew at a 2.4 percent annual pace, less than forecast, after a 3.7 percent first-quarter gain that was larger than previously estimated, according to Commerce Department data issued today.
2010 Dividend Deals
Of the U.S. companies that reported earnings for the period ended June 30, 77 percent beat analyst expectations, according to data compiled by Bloomberg.
There were five dividend deals that raised an aggregate $900 million in loans in all of last year, according Standard & Poor’s Leveraged Commentary and Data.
This year, 31 junk-rated companies borrowed a monthly average of $2.18 billion through April before the number of issuers fell to two in May and volume dropped to $400 million, the data show. The number of deals rose to four in June and seven in July as monthly loan volume climbed above $2 billion.
High-yield, high-risk borrowers are rated below Baa3 by Moody’s Investors Service and BBB- by S&P.
‘Re-Levering of America’
“Companies are on the hook to try and reward equity holders and with the cost of capital coming down so fast and so far in high-yield debt markets, it sets up a strong economic incentive to float debt and buy back stock or provide dividends,” said Christopher Garman, chief executive officer of Garman Research LLC in Orinda, California. “We are beginning to see another re-levering of America.”
Warner Chilcott said the transaction depends on an amendment to its existing credit facilities, which would allow it to borrow more for the payout. The Ardee, Ireland-based pharmaceutical company said it expects to pay the $8.50 per share dividend by Sept. 30.
JPMorgan Chase & Co., Goldman Sachs Group Inc. and Bank of America Corp. will arrange the amendment, according to a person familiar with the talks, who declined to be identified because the terms are private.
Moody’s Ratings
“The dividend will increase Warner Chilcott’s financial leverage,” Moody’s analyst Michael Levesque said today in a report. The ratings company said it stood by Warner Chilcott’s corporate and senior secured credit facility rating of B1, four levels below investment grade. “The rating affirmation also reflects good free cash flow and the company’s prior history of deleveraging.”
Rochelle Fuhrmann, a spokeswoman for Warner Chilcott, didn’t return a phone call and an e-mail seeking comment.
Warner Chilcott rose $1.21, or 4.96 percent, to $25.60, at 4 p.m. New York time on the Nasdaq Stock Market, reaching the highest price since May 13.
Bank of America initiated negotiations Jan. 20 to lower interest rates on Warner Chilcott’s $2.95 billion of bank debt. Lenders led by Stanfield Capital Partners LLC and Oak Hill Advisors LP objected to the transaction on concern it would trigger a return to loose lending standards.
In October, Warner Chilcott borrowed $1 billion in a term loan A with a 3.25 percent margin over the London interbank offered rate and $1.95 billion in a term loan B with a 3.5 percentage point spread over the lending benchmark to finance its acquisition of Procter & Gamble Co.’s prescription-drug unit, according to Bloomberg data. The amendment would have reduced term loan B’s interest rate.
Airvana, Global Brass
Airvana increased pricing on its $330 million loan to fund a dividend and refinance debt, according to a person familiar with the transaction. The Chelmsford, Massachusetts-based maker of telecommunications gear plans to use $175 million of the proposed debt for a shareholder payout.
Global Brass & Copper Inc. will use a $330 million senior secured term loan due 2015 to refinance existing debt and fund a distribution to the equity sponsor, according to an S&P report.
New York-based analysts Maurice Austin and Marie Shmaruk rated the proposed debt B, five levels below investment grade.
The rating “reflects the combination of the company’s vulnerable business risk profile and aggressive financial risk profile,” Austin wrote. S&P cited the company’s exposure to cyclical end-markets such as building and construction that can lead to “wide variations in operating performance.”
--With assistance from Krista Giovacco and Daria Solovieva in New York, Ryan J. Donmoyer, Shobhana Chandra and Timothy R. Homan in Washington. Editors: Faris Khan, Chapin Wright
To contact the reporter on this story: Emre Peker in New York at epeker2@bloomberg.net.
To contact the editor responsible for this story: Faris Khan at fkhan33@bloomberg.net.
