Dividend Recaps In 2025: High-Yield Bonds Crash The Party

Key Takeaways

• Private equity sponsors are increasingly using dividend recapitalizations to return capital to investors amid challenging exit environments.
• Favorable market conditions (tighter spreads, falling average yields) have created an attractive environment for high-yield bond issuance in dividend recaps.
• The future of bond-backed dividend recaps depends on market conditions, investor sentiment, and macroeconomic stability.

In 2025, private equity firms are increasingly turning to dividend recapitalizations to return capital to investors amid a sluggish exit environment. During the Covid-19 pandemic, low interest rates and fiscal stimulus enabled private equity firms to raise funds and invest heavily. Post-pandemic, high inflation and a stricter regulatory environment, including higher interest rates and the Federal Trade Commission's cautious approach to mergers and acquisitions, have made it difficult for buyers to finance acquisitions. Consequently, both M&A deals and IPOs in the U.S. market have significantly declined.

In turn, due to changes in the exit market, private equity firms have faced challenges in returning gains to investors, leading to significant longer holding periods for portfolio companies and delays on the return on investment for investors. Dividend recapitalization—a financing strategy through which a private company incurs new debt to pay a cash dividend to its shareholders—has become more popular during this period as an alternative to keep investors engaged and allow private equity firms to realize liquidity while holding on to the investment in hopes of a stronger return in the near future.

From January 1 through mid-February 2025, dividend recapitalization volume reached US$22.4 billion, a sharp increase from US$14.0 billion during the same period in 2024.¹ While leveraged loans account for 91% of the total volume of sponsored dividend recapitalizations, recent data shows a material uptick in the use of high-yield bonds, marking a noticeable shift in the preferred method for dividend recaps.²

The Return of High-Yield Bonds in Dividend Recaps: Market Context

Bond issuance supporting sponsor-backed dividend recaps is at its highest level in over a decade, with numbers trailing only the 2011 post-financial crisis surge.³ Through late May 2025, bonds backing PE-sponsored dividend recaps totaled US$5.6 billion. While loans continue to account for the vast majority of recapitalization activity, the increasing role of bonds in this space reflects a notable change in market conditions, investor preferences and sponsor strategy.

One of the main drivers of the resurgence of high-yield bonds in dividend recapitalizations is the current credit environment. Spreads remain tight and, despite market uncertainty, default rates have remained manageable. As a result, investors seeking yield have gravitated toward the high-yield space, likely drawn by coupons in the seven to eight percent range⁴ and the possibility for appreciation should interest rates fall later in the year.

Investor demand has also played a central role in supporting bond issuances. Market participants are actively seeing yield in a credit environment that has, so far, defied expectations of elevated defaults. According to Lord Abbett's 2025 outlook, default risk remains low and distress ratios remain subdued.⁵ In this context, recap-driven high-yield deals have become more palatable to the buy-side, particularly as investors price in a softening rate environment and move toward fixed-rate instruments with longer durations.

The market's renewed interest in bonds also reflects ongoing constraints in the capital markets. IPO and M&A volumes remain below historical norms, limiting traditional exit routes and, as such, limiting the traditional avenue for return to investors. Amid increasing pressure to return capital to investors, sponsors are turning to the high-yield market, which has been historically viewed as the more expensive and less flexible option compared to leveraged loans for comparatively attractive pricing and conditions.

High-Yield Bonds vs. Traditional Leveraged Loans in a Dividend Recap Context

High-yield bonds and leveraged loans both serve as viable tools for funding dividend recaps, but they differ materially in terms of structure, documentation and investor base.⁶ High-yield bonds generally carry fixed interest rates, have longer maturities and have incurrence-based covenants. They are typically sold to a broad base of institutional investors, with covenant packages that provide flexibility to issuers post-closing. Bonds also permit issuers to lock in funding costs over a longer horizon.

Leveraged loans, by contrast, are typically instruments with floating rates, generally have tighter maintenance covenants and have shorter terms. They often also require more frequent lender engagement throughout the life of the loan. Loans are typically syndicated to a narrower base of buyers and their pricing adjusts as a result of the floating interest rate. While loans frequently involve more administrative complexity and generally tighter restrictions, they can also offer greater flexibility for refinancings or future capital structuring.

Choosing High-Yield Bonds over a Leveraged Loan

As noted above, some private equity sponsors are opting to use high-yield bonds to finance dividend recaps at a heightened rate, strategically working with favorable market conditions and investor demand. The primary driver behind the shift is cost.

Average pricing on a recapitalization-related bond deal has dropped to 7.36% in 2025, down from 8.38% in 2024,⁷ making bonds more competitive than their floating-rate loan alternatives. While some issuers are still paying elevated coupons, the market trend demonstrates that bond markets are becoming increasingly receptive to recap-driven issuances.

Borrowers may also prefer high-yield bonds because they can offer access to a broader, more diverse pool of capital. While leveraged loans are often absorbed by CLO vehicles and bank loan funds, bonds often attract insurance companies, mutual funds and total-return investors. This more diversified demand has helped push forward the comeback of high-yield bonds despite ongoing macroeconomic volatility.

Conclusion

The rising popularity of high-yield bonds in dividend recapitalizations reflects a notable shift in sponsor preference and capital market dynamics. Against the backdrop of elevated interest rates, subdued M&A activity and weakened IPO markets, private equity sponsors are under increasing pressure to return capital to their investors. In this environment, dividend recaps have reemerged as a key liquidity strategy and high-yield bonds are playing an elevated role.

Tighter spreads, falling average yields and a renewed market appetite for fixed-income assets have created a favorable environment for bond issuance. At the same time, the structural features of a high-yield bonds—longer tenors, fixed rates and flexible covenant packages—offer sponsors an appealing alternative to leveraged loans. As a result, high-yield bonds are gaining market share in recapitalization transactions.

Looking ahead, continued sponsor interest in bond-backed dividend recaps will depend on market conditions, investor sentiment and macroeconomic stability.

Footnotes

1. Source: Pitchbook.
2. Source: Pitchbook.
3. Id.
4. Id (5/26 Table).
5. See Lord Abbett: "U.S. High Yield: Poised for Continued Resilience" (June 24, 2025).
6. See Marquette Associates "Perspectives" (Dec. 2023).
7. Source: Pitchbook.

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