(Bloomberg) -- The snack maker behind some of Walmart Inc. and Frito-Lay’s most popular treats is offering bond investors double-digit yields to finance a $400 million payout to its private equity owner.
Shearer’s Foods is floating a rate of around 10% on the eight-year sale, which will back a distribution to Clayton Dubilier & Rice, according to people familiar with the matter. Deutsche Bank AG is leading the transaction, which is expected to price Sept. 10, the people said.
The so-called dividend recapitalization is notable in part because of how soon it comes after CD&R’s acquisition of the company, which was only completed in February. The transaction is expected to boost Shearer’s leverage ratio, a measure of debt relative to earnings, to 7 times from 5.8 times, according to S&P Global Ratings, which assigned the debt offering a CCC+ rating, making it the US high-yield market’s first CCC rated deal since July.
Representatives for Shearer’s and Deutsche Bank didn’t respond to requests seeking comment, while CD&R declined to comment.
Dividend recaps, wherein owners of risky companies raise debt in the firm’s name to hand cash to investors, have surged this year amid benign credit conditions and a dearth of traditional dealmaking. The catch is that extra debt and leverage makes it harder for companies to cope when economies slow, or rates stay higher for longer.
Shearer’s planned bond sale also comes amid a deluge of issuance for riskier transactions that have kept junk-bond and leveraged loan investors busy since the Labor Day holiday.
As part of CD&R’s acquisition of Shearer’s from the Ontario Teachers’ Pension Plan, the buyout firm contributed roughly $1.1 billion of its own capital, according to bond offering documents reviewed by Bloomberg. The company also issued $1.72 billion in leveraged loans in high-yield bonds to fund the purchase.
Shearer’s, which also makes snacks for Costco Wholesale Corp. and Trader Joe’s, is expected to have interest expenses of about $200 million next year, according to S&P, up from a previous forecast of $156 million. S&P expects leverage to decrease to 6.4 times at the end of the 2025 fiscal year as Shearer’s sales and earnings continue to grow.
“While we expect the macroeconomic environment to remain weak, we believe the weak macroeconomic backdrop, including stretched household budgets, will continue to drive steady demand for its private-label product offerings,” S&P analysts led by Arpi Gupta wrote in a Thursday report.
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