Issuing debt and using the proceeds to pay a special dividend to stockholders. When a company incurs a new debt in order to pay a special dividend to private investors or shareholders. This usually involves a company owned by a private investment firm, which can authorize a dividend recapitalization as an alternative to selling its equity stake in the company. Dividend recapitalization are used by private equity firms that wish to extract cash from businesses they have acquired
Also known as a “dividend recap”.
For example, in 2006 two private equity firms purchased Travelport for $1 billion plus $3.3 billion of debt. Less than a year later, the new owners undertook a dividend recapitalization by issuing $1.1 billion in new debt and using the proceeds to pay themselves a dividend.
The dividend recap has seen explosive growth, primarily as an avenue for private investment firms to recoup some or all of the money they used to purchase their stake in a business. It is generally not looked upon favorably by creditors or common shareholders because it reduces the credit quality of the company while only benefiting a select few.
While dividend recaps appear to be an attractive option for private equity firms, several risks need to be considered. Since dividend recaps are leveraged transactions, there will be additional fixed costs that are associated with the payment of principal and interest on the additional debt incurred to fund the dividend. A company faces the risk of becoming overleveraged if these additional costs are not properly analyzed during the structuring of the dividend recap. This can be significant if it leaves the company vulnerable to future significant fluctuations in revenues and expenses because of a downturn in the markets, increases in interest rates, or the loss of significant customers. These factors could erode the previously distributed “appreciation” and result in either bankruptcy or future restructuring needs.
I need some reports on Dividend recap activity