The recent slowdown in M&A and LBO-related loan issuance volumes is providing an opportunity for sponsors and arrangers to launch dividend recapitalization (recaps) transactions intended to normalize returns on investments, according to Fitch Ratings.

Fitch estimates dividend recaps can result in 1.5x turns of additional leverage on average, affecting both credit profiles and recovery prospects. 

Strong investor demand combined with lower volume, a light forward calendar and constructive market sentiment are enabling issuers, sponsors and agents to tap markets at what are still relatively favorable rates for dividend recaps. Additionally, the prevalence of issuer-friendly terms in restricted payments baskets weakened provisions meant to control value leakage via dividend payments. Public issuers can use a company's balance sheet to enhance shareholder value, while sponsors can extract value from privately-owned issuers to boost their own returns.

Dividend recap volume for April was $3.6 billion, representing 13% of total institutional loan volume. The April increase coincides with a decline in M&A related volume which has edged up so far in May, reaching 16% of institutional loan issuance. The last monthly spike in dividend recap volume was in October 2018, when it reached $4.4 billion, according to data from LevFin Insights. May YTD dividend recap volume totaled $11.2 billion, with the majority of the volume in March, April and May.