November 6, 2006

Buyout Firms Hurt Bondholders by Gorging on Dividends

By John Glover and Cecile Gutscher

Nov. 1 (Bloomberg) -- After Weetabix Ltd., the maker of Britain's best-selling breakfast cereal, fired 7 percent of its workers and canceled the employee bus service to free up cash for debt from a leveraged buyout, the Kettering, England-based company borrowed 130 million pounds ($249 million) so it could enrich owner Lion Capital.

Bondholders worldwide are suffering a double whammy this year because more than 80 companies controlled by LBO firms have borrowed at the expense of workers and debt investors just so they can pay themselves dividends, according to data compiled by Bloomberg and Standard & Poor's.

``We don't like it,'' said Andrew Wilmont, who helps manage $65 billion of fixed-income assets at Axa Investment Managers in London. ``The more you leverage up the company, the less the company has to fall back on if things turn bad.''

Firms such as New York-based Blackstone Group LP and Kohlberg Kravis Roberts & Co. completed $269 billion of LBOs this year by borrowing at least $166 billion in loans and bonds, according to Bloomberg and Lehman Brothers Holdings Inc. data.

Companies owned by the LBO groups sold an additional $30 billion of debt this year for dividends, said S&P. The payments have helped the firms recoup 86 percent of their investments within two years, according to Fitch Ratings in New York.

LBO firms, which typically borrow two-thirds of the money they pay for acquisitions, used to wait three to five years before profiting from selling shares in their companies

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