PRIVATE equity firms in Asia Pacific are increasingly paying special dividends to themselves funded by refinancing debt of the businesses they own, a development that is being fuelled by frothy credit markets and sluggish prospects for "exit" sales.
So-called dividend recapitalisation loans have been popular for some years in North America and Europe. Their growth in Asia is a sign the region's leveraged finance industry is evolving from its conservative past, with local banks fiercely competing to provide loans even if it means loosening credit standards.
The attraction for a private equity firm is that it can recoup some or all of the cost of its stake in the business without selling out.
But the practice is controversial, raising concerns that companies are being burdened with heavier debt piles and thinner cash flows at a time when economic growth in Asia is slowing.
"For the PE (private equity) firms, recaps offer the benefit of being able to pull out cash without losing control," said Andrew Palmer, a Standard & Poor's credit analyst. "But they have to strike a balance to ensure they do not destroy the value in the company."
Defenders of the "dividend recap" say the transactions can lower debt-servicing costs and provide more flexible loan terms on cash-rich companies.
Critics say proceeds from new loans should go back into the business, and point to several cases where companies have crumbled under the weight of private equity-backed debt loads.
A typical private equity deal involves buying a company by borrowing around two-thirds of the purchase price and selling it later at a profit. In a dividend recap, a buyout firm borrows more money from lenders and then uses the company's cash flow to pay itself a dividend.
Recaps are growing in popularity across all major markets as buyout firms seek to lock in favourable loan terms while interest rates remain near zero.
Asia, excluding Japan and Australia, has seen a combined US$3 billion (RM9.54 billion) of the deals in the last two years, according to Thomson Reuters LPC, up from small-to-zero volumes in previous years.
Another factor is that private equity firms are struggling to sell their companies, or find "an exit" in industry jargon, either to private buyers or through the IPO markets.
Private equity-backed merger and acquisition volumes fell 34.3 per cent in the third quarter to US$24.8 billion, according to Thomson Reuters data. Reuters