In the first quarter, about five private equity-backed U.S. health-care companies borrowed money to pay investors dividends, a practice called dividend recapitalizations, a report by the non-profit Private Equity Stakeholder Project shows.
Last year, across the entire private equity landscape, dividend recapitalizations represented 6% of the $455 billion total leveraged loan market, according to Washington-based private equity trade group American Investment Council, citing S&P Global data.
One of those five companies that undertook a dividend recapitalization in the first quarter of 2021 also received relief under the Coronavirus Aid, Relief, and Economic Security Act: Ares Management Corp.'s private equity portfolio company DuPage Medical Group Ltd., a physicians practice, the Private Equity Stakeholder Project's report said.
In February, DuPage refinanced its loans and funded a $209 million distribution to investors, the group's report said. Private equity is Ares Management's second largest business, accounting for $27.4 billion of Ares' total $197 billion of assets under management.
In a February ratings report, Moody's Investors Service said it expects DuPage's debt to earnings before interest, taxes, depreciation and amortization to decline to about 5.7 times by the end of 2022, from an estimated 6.6 times leverage in 2020.
Still, Moody's said that the distribution to investors was a credit negative, which "meaningfully" reduced DuPage's cash on hand to pay the dividend.
"It points to the aggressive nature of DuPage's financial policies, a key governance issue," Moody's said. "Combined with higher gross financial leverage, this will leave DuPage more weakly positioned to absorb any unexpected operating setback or incremental debt."
Moody's added that DuPage's policies could hurt stakeholders such as patients.
"DuPage's aggressive policies pose social risks as key customer relations stakeholders include patients, payors and government entities."
Moody's warned that DuPage's ratings could be downgraded if, among other things, the company pursues another investor dividend or a large debt-funded acquisition. Ares executives declined to comment.
However, sources with knowledge of the situation said that refinancing DuPage's debt lowered the company's interest expense and kept DuPage's total leverage level the same.
They said that the dividend was paid to the fund from cash on hand.
Ares executives would not identify the private equity fund holding the DuPage investment.
