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Booz Allen Hamilton, the defence consulting firm majority owned by private equity group Carlyle, plans to raise up to $2.25bn in debt to refinance existing borrowings and fund a $1bn special shareholder dividend.
The extraction of such dividends remains popular at private equity-controlled businesses, with at least 35 such deals worth more than $11bn completed in the first half of the year, according to Moody’s.
Dividend payments by speculative grade or “junk” rated companies rose 10 per cent in 2011 and the trend has continued into 2012, according to the rating agency. They include an almost $2.2bn payout by Clear Channel Worldwide and an $870m dividend from hospital operator HCA.
But so-called dividend recapitalisations in periods of easy lending remain controversial, particularly in a US election year where the presidential candidacy of Mitt Romney, former head of Bain Capital, has prompted renewed scrutiny of private equity practices.
Steve Judge, head of the Private Equity Growth Capital Council, said the default rate on dividend recapitalisations is lower than for other debt transactions. “The combination of the maturity extension and lower interest rates often leaves the company stronger, on balance”.
Booz Allen said in a regulatory filing that it is exploring the possible refinancing of about $959m in debt, with the remaining proceeds used to pay the special dividend. A spokesman said, “It’s prudent to consider borrowing money at prevailing low rates and using cash on hand to refinance our existing debt and pay a special dividend to our shareholders.”
After the announcement, Moody’s placed Booz Allen’s debt rating under review for a possible downgrade from its current rating of Ba2, two notches into junk territory.
Moody’s said the refinancing “would indicate a reversion towards an aggressive financial policy by Booz Allen, given the large size of the proposed dividend during a period of uncertainty as to future government spending, particularly in the defence sector.”
Moody’s said the risk of future aggressive financial policies has been heightened, particularly as the company is still over 70 per cent owned by Carlyle. However, Moody’s says debt funding for junk-rated companies remains less aggressive than during the credit bubble of 2006 and 2007.
Booz Allen’s earnings before interest, tax, depreciation and amortisation have doubled since the company was acquired by Carlyle in 2008. After the proposed issuance, debt to ebitda will be half the level it was at the time of the buyout.