(Bloomberg) — Car battery maker Clarios International Inc. launched a loan deal on Wednesday that will go toward paying a $4.5 billion dividend to its private equity owners — one of the largest such payouts on record.
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The Wisconsin-based firm is to hold an investor call later in the day to pitch a $2.5 billion dollar-denominated term loan and an $800 million-equivalent euro term loan, according to people familiar with the deal who asked not to be named. The debt launch comes after the company shelved plans for an initial public offering.
The company is expected to raise a further $1.2 billion of debt by tapping high-yield bond investors shortly, the people said. The bond is likely to launch toward the end of the loan syndication process, which closes on Jan. 15, they added.
The new issuance will push Clarios’ debt pile to around $12.5 billion. Its current debt pile stands at around $8 billion, data compiled by Bloomberg shows.
The proceeds will fund a distribution to shareholders, including Brookfield Asset Management Ltd. and Canadian pension fund Caisse de Depot et Placement du Quebec, the people said.
A dividend recapitalization, where sponsors pile debt onto a portfolio company in order to fund a payout, is a typical private equity strategy used to meet return targets when a conventional exit via a sale or an IPO proves impossible or unattractive.
“From a credit standpoint, this contemplated dividend recap is obviously negative, due to the substantial rise in net leverage,” analysts at SpreadResearch wrote in a note. “Also, the raising of additional debt will probably leave lower headroom for cash generation.”
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A number of private equity firms used dividend recapitalizations to monetize investments last year. Most notably, UK vehicle glass repair company Belron International Ltd. sold more than €8 billion ($8.8 billion) of bonds and loans which was earmarked for a €4.3 billion dividend payout, along with some of the company’s own cash.
Such moves are typically a feature of hot debt markets.
A muted environment for M&A has led to a dearth of new-money deals, meaning companies’ private equity owners have tended to have the upper hand with investors keen to put money to work. Dividend recaps offer them that opportunity.
The hefty debt raise for Clarios is set to test the market’s appetite for a single-name borrower. But given the amount of new issuance of collateralized loan obligations — the biggest buyers of leveraged loans — along with vast inflows into credit funds, investors are likely to snap it up, the people said. Being the first big deal out of the blocks in 2025 is also a boon.
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The pricing offered on the loan underlines sponsors’ expectation that the deal will sell well. Despite the potential downward pressure on its credit rating from its increased debt pile, Clarios isn’t proposing much of a premium.
The loan is offered at 300 to 325 basis points over the benchmark on the dollars and 350 basis points over the benchmark on the euros — in line with current market pricing.
Both loans are also offered at a 99.5 original issue discount — a 50 basis point discount off par, the people said.
The deal suggests credit investors value the company more highly than the equity market. As a well-known issuer, the company is considered a stable, cash-generating business, that has very little capital expenditure and a predictable income source, the people said. Credit managers see the EV transition as an unlikely short term threat, they added.
(Adds detail on bond deal in third paragraph, context on market from eighth paragraph on)
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