Moody's warns of dividend recaps

TheDeal.com, July10, 2007:
Are private equity firms guilty of playing bait-and-switch with credit rating agencies while drawing off a mother lode in dividends from the companies they own?
In a five-page report released Monday, July 9, Moody's Investors Service said that many of the dividend recapitalizations engineered by buyout houses since 2004 have taken it by surprise.
The comments on recaps were part of a wide-ranging, often caustic critique of the private equity industry's recent behavior, which the ratings agency accused of focusing too much on short-term returns to the detriment of long-term value creation.
Without accusing sponsors of duplicity, Moody's points up cases where it had assigned a target company a rating based on sponsors' assurances that they would use surplus cash flow to pay down debt.
Instead, the new owners turned around and paid themselves huge dividends, often within 12 months of the original LBO. Some dividends even surpassed the sponsors' equity investments.
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