NEW YORK (
) - If there's been any investor takeaway from the
newest round of
, it's that debt markets are booming and stock markets, which recently touched on post-crisis highs, are on life support.
For the world's most sophisticated investors like private equity and hedge funds, a dynamic of roaring bond markets and fear-laden stock markets presents opportunity, as buyouts and investments in complicated debts become easier to manage. The average stock investor; however, has likely been hard pressed to find a benefit from the Fed's policy to
But for investors watching news announcements from the likes of hospitals giant
, industrials conglomerate
, consulting expert
Booz Allen Hamilton
, and pharmaceuticals specialist
there's a clear link between bubbling debt markets and stocks. Namely, those companies are using cheap money to fund big dividends paid to private equity investors and ordinary shareholders.
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As investors chase the higher yields of bond offerings by debt loaded companies rated at sub-investment grade, or 'junk,' dividend hungry stock investors may want to pay attention to the phenomena. Because private equity giants have IPO'ed many large pre-crisis buyouts and are using spongy bond markets to fund billion dollar dividends, investors can look at those companies as a way to bridge a gap between Fed fueled debt markets and stocks.
In recent months, the five aforementioned companies have used junk debt offering to pay billion dollar-plus dividends to shareholders, which go to private equity holders and the investing public on a pro-rata basis. As 2012 draws to an end, analysts at Evercore Partners
to pay a big dividend to investors, which includes large minority holder
. Meanwhile, publicly traded companies like
may be in a position to soon pay longtime private equity backers and investors a payout. Other private equity backed public companies like
already pay 4% dividend yields.
In an Oct. 16 Moody Ratings report, the bond rating agency highlights that junk bond issuance by corporations owned by private equity to fund investor dividends recalls the heady days of the credit boom. "Recent debt-funded dividend recapitalizations show investors' willingness to accept structures that prevailed prior to the credit crisis," writes Moody's senior vice president Lenny Ajzenman in the report.
In a follow up conversation, Ajzenman noted that debt-fueled private equity dividends signal a general weakening of credit quality. When pressed on what it means for stock investors, Ajzenman says dividends may have the same appeal as the bond offerings that fund the payouts - namely an investor hunt for cash yields.
Obviously, there are big risks for both bond and stock investors chasing low quality yields. Ajzenman highlights increasing leverage, less financial flexibility and whether operating earnings can outweigh interest payments were yields to rise, as the biggest issues for investors to consider.
James Krapfel, an IPO analyst with Morningstar highlights that, in certain instances, if private equity owners are IPO'ing a company but intend to remain long-term investors, their familiarity with high finance can play to the benefit of ordinary shareholders. Still, Krapfel says chasing big private equity dividends - known as dividend recapitalizations - generally is for fast-money investors, who fall outside of Morningstar's purview.
on Oct. 22 signals that as the Fed pushes bond investors to chase the yields of the highly leveraged issuers, the overall market is being
of the riskiest bonds - loans to corporations with a rating of CCC or lower.
"The share of newly minted bonds rated 'CCC' or lower climbed to 26% of total volume ($38.6 billion) -- a record for the year -- as the Federal Reserve's launch of QE3 further stimulated investor appetite for high yield in the primary and secondary markets," writes Fitch Ratings, in the report.
Those market dynamics help corporations stress and in need of financing - or firms that are being pursued by private equity investors. For instance,
recently went from the threat of bankruptcy to a buyout target as it
to meet its cash needs.
Booming debt markets have also helped private equity giants line up
or to alleviate pressures on existing debt saddled investments.
Still, as Fitch Ratings warns in its report, booming junk debt markets aren't a panacea for cash strapped companies or, presumably, their private equity and public shareholders.
"The Fed's efforts to revive the economy and a positive resolution to the U.S. fiscal cliff remain critical even as the heightened demand for yield product is allowing more highly levered and vulnerable companies to access the debt markets," writes Fitch. "A more robust economic environment is especially important over the next several years as the liquidity boost from record issuance diminishes," the agency adds.
Were investors to shy away from chasing the prospective yields of publicly traded private equity investments, they may be wise to have a look at investing directly in public private equity firms. Currently, PE firms like
Apollo Global Management
and are seeing earnings recover as the value of their investments rises.
On Friday, KKR swung to a profit compared with big losses at this time last year, as the firm's holdings gained in value and billions in new money flowed into its coffers. The results mirrored similar strong earnings from Blackstone Group earlier in October.
For more on how Fed policies are causing investors to rethink their 2012 playbook, see why Warren Buffett's Wells Fargo investment
and why bank stocks may face
-- Written by Antoine Gara in New York