Key Takeaways:
Private equity firms are increasingly turning to Europe's junk debt market to fund dividend payments to themselves, a sign that volatile markets are shutting down the preferred exit routes of IPOs and company sales. The trend, known as dividend recapitalization, involves layering more debt onto portfolio companies, with at least three such deals hitting the market recently, including a €475 million bond sale by Brookfield-backed Befimmo.
"This is top-of-the-market behavior showing up in a market that isn’t hot, which is a red flag," said Sabrina Fox, a leveraged finance expert and founder of Fox Legal Training. "Sponsors are pulling out dividends because the docs let them, and the leverage going back onto these businesses comes at exactly the wrong point in the cycle.”
The deals highlight a pivot in strategy for sponsors who had entered the year with high hopes for M&A. Befimmo's recent bond sale earmarked €75 million for a dividend, prompting S&P Global Ratings to cut its outlook to negative, citing increased leverage. Other companies pursuing similar deals include Lutech SpA and Cooper Consumer Health, which is owned by a CVC-led consortium.
With M&A volumes falling below expectations for 2026, sponsors are using recaps as an "alternative route to liquidity," according to Hadrien Servais, a partner at law firm Simpson Thacher & Bartlett. The willingness of lenders to fund these deals, despite the added risk, reflects a large amount of available capital and intense competition for high-quality credits.
While dealmaking is slow on both sides of the Atlantic, the dividend recap trend is currently concentrated in Europe. The cost of funding is significantly lower in the region compared to the United States, driven by lower government bond yields. "Europe is quite attractive vs. the US as the cost of funding is much lower, due to lower bund yields vs treasuries,” said Mahesh Bhimalingam, Global Head of Credit Strategy at Bloomberg Intelligence.
This cost differential makes it more feasible for sponsors to issue new debt for payouts without immediately boosting company earnings. Despite concerns from ratings agencies, credit funds and CLOs, many of whom are existing lenders, appear willing to finance the transactions. This is partly due to the large amount of "dry powder" they hold and limited alternative opportunities to deploy it, keeping the financing window open for now.
This article is for informational purposes only and does not constitute investment advice.
