The mini-boom in leveraged recapitalizations in the fourth quarter will peter out now that the dividend tax issue in the U.S. is resolved, according to Moody’s Investor Service. A record 52 companies issued $15 billion in debt to fund dividends in the fourth quarter – triple the average pace in the first three quarters of 2012.
Dividend recap business has already fallen off, the ratings firm said in a recent report. Investors breathed a sigh of relief that the dividend tax rate, previously 15 percent, did not more than double to their highest marginal rate, which would have happened if the Bush Jr. tax cuts had been allowed to expire. Rather, the fiscal cliff compromise in January set the dividend tax rate at 23.8 percent.
That’s not to say the leveraged finance market has regained its sanity. Dicey debt is still flying off the shelves. In fact, investors have been stupid enough to lap up large amounts of pay in kind notes, the instruments that proved to have recovery rates of about zero in the wake of the global financial crisis. PIKs accounted for some 20 percent of the debt raised for the dividend recaps in the fourth quarter.
Most of the rest came from the leveraged loan market, which allowed some borrowers to leverage themselves a suicidal seven times over. Those borrowers accounted for 22 percent of the fourth quarter total. In the third quarter, gonzo borrowers only accounted for seven percent of the total leveraged debt issued.