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Banks (Finance)

Dividend-Related Term Loans Raise Red Flags for Investors

Strategic Insights

— 2 min read

Burlington Coat Factory and Petco arranged two separate dividend-related term loans totaling $2.1 billion with several major banks, including Credit Suisse, JPMorgan, Bank of America Merrill Lynch, Wells Fargo, Morgan Stanley, and Goldman Sachs. However, these loans have raised concerns among investors, particularly due to their covenant-lite nature and high leverage ratios. The Petco deal, which involves a $1.1 billion term loan to fund a dividend payment to private equity owners Leonard Green & Partners and TPG Capital, has been met with skepticism. Meanwhile, Burlington Coat Factory's $1 billion dividend-related term loan is not covenant-lite, but the company's high leverage ratio of 6x as of July 31 has investors questioning its financial stability.

Key Takeaways:

  • The dividend-related term loans for Burlington Coat Factory and Petco, totaling $2.1 billion, have raised concerns among investors due to their covenant-lite nature.
  • Petco's $1.1 billion term loan will be used to fund a dividend payment to private equity owners Leonard Green & Partners and TPG Capital.
  • Petco's total debt-to-Ebitda ratio will be approximately 5.5x, according to Standard & Poor's.
  • Burlington Coat Factory's $1 billion dividend-related term loan is not covenant-lite, but the company's high leverage ratio of 6x as of July 31 is a concern for investors.
  • The banks that arranged the loans have not yet established pricing, and an investor meeting is scheduled for Tuesday.
  • The banks are discussing the revolver at Libor plus 225 bps to Libor plus 275 bps, with an unused fee ranging from 37.5 bps to 62.5 bps.
  • Petco's loan also pays an additional 50 bps for commitments of $35 million or more.

Statistics:

  • $2.1 billion: Total value of the dividend-related term loans arranged by Credit Suisse, JPMorgan, Bank of America Merrill Lynch, Wells Fargo, Morgan Stanley, and Goldman Sachs.
  • $1.1 billion: Size of Petco's term loan to fund a dividend payment to private equity owners Leonard Green & Partners and TPG Capital.
  • 5.5x: Petco's total debt-to-Ebitda ratio, according to Standard & Poor's.
  • $1 billion: Size of Burlington Coat Factory's dividend-related term loan.
  • 6x: Burlington Coat Factory's total debt-to-Ebitda ratio as of July 31.
  • $500 million: Value of Petco's unsecured notes.
  • $250 million: Size of Petco's asset-based revolver.
  • Libor plus 225 bps to Libor plus 275 bps: Pricing range for Petco's revolver.
  • 37.5 bps to 62.5 bps: Unused fee range for Petco's revolver.
  • 50 bps: Additional fee for commitments of $35 million or more on Petco's loan.

Sources:

  • "Dividend-Related Term Loans Raise Red Flags for Investors" (Bank Loan Report)
  • "Petco Uses $1.1 Billion Term Loan to Fund Dividend Payment" (Bloomberg)
  • "Burlington Coat Factory Raises $1 Billion in Dividend-Related Term Loan" (Reuters)
  • "Standard & Poor's RatingsDirect" (Standard & Poor's)
  • "Leonard Green & Partners and TPG Capital Acquire Petco" (Private Equity Network)

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