US companies return to "dividend recaps" Complex lending practices that proliferated ahead of the financial crisis are making a comeback as investors flock to US high-yield corporate debt. Dividend deals in private equity-controlled companies and payment-in-kind toggle notes - which give a company the option, in a squeeze, to pay lenders with more debt, rather than cash - have seen a surge in recent months as market conditions favour corporate borrowers. In the third quarter, there were at least 14 debt-financed dividend recapitalisations worth a total of more than $5.5bn among rated US companies controlled by private equity sponsors. That follows 35 recaps worth more than $11bn in the first half of the year, according to a Moody's report released on Tuesday. In another sign of investors" comfort with riskier structures, PIK toggle offerings, which were common during the credit boom, are also rising. After two such deals in the last quarter, Petco Animal Supplies, Pharmaceutical Product Development and Jo-Ann Stores announced proposed PIK toggle offerings this month. The resurgence of these practices is part of a refinancing wave that has enabled companies to loosen deal terms and pay out money to shareholders. But it is also gaining fuel from investors" continued move into high-yield debt at a time when benchmark interest rates are near record lows. Lenny Ajzenman, a senior vice-president at Moody's, said the market for dividend deals and Pik toggle notes will remain strong in the fourth quarter. "We expect debt-financed dividends to remain a popular way for private equity to extract returns from sponsored companies, given low yields on loans and bonds and reasonably stable credit conditions," he said. Overall, total dividend payments were up more than 30 per cent in the first half of 2012 versus the same period of 2011, as a growing number of companies sought to ratchet up shareholder rewards, according to a sample of 800 speculative-grade corporations, Moody's said. In addition, Moody's said the market for initial public offerings and merger and acquisition activity remains soft, limiting private equity exits. The potential for an adverse change in the federal tax treatment of dividends in 2013 also may be motivating sponsors to act this year. Still, the practises were widely criticised as part of an easing of lending that led to the credit crunch as they contributed to companies" balance sheet deterioration. In the third quarter, 27 per cent of the companies that executed a dividend recap had their ratings downgraded, compared with less than 15 per cent in the first half of 2012. In one example, Moody's cut by one notch Booz Allen Hamilton ratings, after the company conducted a $1bn dividend recap, one of the largest deals this year.