Companies have been selling risky loans to fund payouts at the fastest pace in years. Harbor Freight Tools USA Inc., a discount tools retailer run by billionaire Eric Smidt, is the latest borrower looking to line its pockets.
The company, which sells $7.99 wrenches and $8.99 plier sets, is seeking to borrow $3 billion in what will be its fifth such deal in the past decade, according to data compiled by Bloomberg.
It plans to use some of the proceeds to refinance existing debt and the rest for a dividend, according to a person familiar with the matter. Credit Suisse Group AG, which is leading the seven-year deal, kicked off marketing on Monday and the offering may price as soon as Oct. 14, said the person, asking not to be identified discussing a private matter.
Representatives for the Camarillo, California-based company didn’t immediately respond to a request for comment. A representative for Credit Suisse declined to comment.
So-called dividend recapitalizations have soared in recent weeks amid low borrowing costs fueled in part by liquidity-boosting policies by the Federal Reserve and rising demand from yield-starved investors that have little else to buy. About $12.6 billion of loans funding payouts to shareholders were launched in September, the most for any month in about six years, data compiled by Bloomberg show.
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Smidt, Harbor Freight’s chairman and chief executive officer, has been steadily raising debt against the closely held company since 2005, with dividend deals issued in 2010, 2012, 2013 and 2016, according to Bloomberg-compiled data. Smidt’s net worth is $5.1 billion, according to the Bloomberg Billionaires Index.
Harbor Freight is offering investors a spread of 3.25 to 3.5 percentage points above the London interbank offered rate for the loan, according to the person. Like other recent deals of its kind, the debt is rated in the top tier of junk debt at Ba3 by Moody’s Investors Service, or three levels below investment grade.
Its business has also fared relatively well during the pandemic, with stores deemed as essential and the vast majority of its premises remaining open with modified hours during the outbreak, according to Moody’s. The dividend deal will add about $850 million of additional debt to the company’s balance sheet but it could deleverage quickly, according to Moody’s.
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