Private equity firms are famous for piling on debt to pay themselves lucrative dividends when the good times are rolling. It’s typically a telltale sign that markets are flush with cash and investors are willing to buy anything.

So when these deals began hitting the market, one after the other, to start the year — and investors in turn quickly snapped them up — it raised some eyebrows. In the US and Europe, companies have done $5.8 billion worth of such deals already in 2023, according to data compiled by Bloomberg.

Many analysts see the trend as temporary, essentially a blip caused by the return of risk appetite at the start of the year and a lack of new deals to invest in due to depressed M&A activity. Hence the arrival of dividend recapitalizations, as these kinds of transactions are called.

Last week, British billionaire Jim Ratcliffe’s petrochemical firm Ineos Quattro started the process to raise €750 million ($796 million) of euro and dollar loans for a dividend. Ratcliffe is battling Qatari Sheikh Jassim Bin Hamad J.J. Al Thani to buy football club Manchester United FC.

“Certain dividend recaps have been made possible in the market,” said Jeremy Duffy, a partner at law firm White & Case. “The stars have somewhat aligned.”

Still, the debt sales are an oddity in the risk-averse market and one that’s been limited to the sub-investment grade space. As a whole, companies are preparing for tough times ahead as high interest rates and inflation take a toll on consumer spending. So far this year, as many as 17 companies in the Dow Jones US Total Stock Market Index have cut their dividends, and there’s concern that others will have to follow.

But for now, investors are showing a willingness to keep funding private-equity payouts. In Europe, companies have raised $2 billion in dividend recapitalizations, accounting for 12% of all leveraged loans sold this year, according to data compiled by Bloomberg. That compares with just 4% of the total in 2022.

“As appetite in the syndicated loan market improves but M&A primary supply remains slow, we have seen a number of dividend recaps in 2023,” said Nicholas Clark, co-head of global leveraged finance at Allen & Overy LLP. “Demand for these has been healthy where the business has a strong track record.”

Eviosys, a French maker of food packaging and aluminum cans, saw such high demand for its €350 million loan last week that it was increased to €400 million and the company shortened the deadline for investors to put in their orders. The money will go to a dividend for its private-equity owner, KPS Capital Partners LP.

Also this month, luxury clothing retailer Isabel Marant sold a bond with an 8% coupon with proceeds going to pay majority shareholder Montefiore Investment SAS and repay some of its existing notes. In the US, there have been similar deals for companies including AOC, Oryx Midstream and CQP.

--With assistance from Molly Price.

This article was provided by Bloomberg News.