Private equity investors may not realize the amount of debt that may be issued by private equity firms that often times use the debt just to pay out dividends to the owners. This “recapitalization” can increase the company’s default risk. One observer describes these dividend deals as “taking out a home equity loan and using the money to go on vacation.”
For example, in July 2013, 60% of all the bonds issued by private equity companies were used to pay shareholder dividends. The average annual interest payment was 8.2%. More than half of the dividend-bond deals for the first half of 2013 were rated CCC by S&P, the lowest credit rating for new bonds (vs. 11% for 2012).