The Resurgence of High-yield Bonds and Leveraged Loans Bolsters Unprecedented Cash Extractions from Leveraged Businesses

Shareholders, in the quiet of the storm, have been reallocating debt to extract substantial cash from leveraged companies, reaching record levels unseen before. Leveraged loans and high-yield bonds are the weapons of choice in this aggressive gambit. As of May 26, these tools backed 12% of this year’s debt raises for shareholder distributions, the record high for any comparable period.

Building upon the momentum of last year’s dividends, the seemingly unstoppable trend has been born out of necessity in a tumultuous market landscape. With trade tensions strangling exit schedules and IPO volumes remaining stubbornly below historic levels, arbitrage-driven shareholders are hungrily seeking returns. The current strategy? Paying dividends while awaiting traditional exit markets to rise again.

Delving into the figures, $31.7 billion of leveraged financing backed payouts to May 26 this year for PE-sponsored companies. This was a slight increase year to year, just shy of 2021’s record $31.8 billion. During the 2022-2023 rate hike years, cumulative issuance stood around $12 billion for the two periods, a far cry from less than $1 billion during the pandemic-stricken 2020.

Although bonds have been taking a backseat to loans as the preferred vehicle for sponsored dividend deals this past year, high-yield bonds are beginning to contribute more heavily as spreads recover from initial tariff shocks. Bond backing for recap/dividend high-yield bonds now accounts for 7% of YTD bond volume, a rise from 3% last year, setting a fast paced trend for the rest of 2023.