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UPDATE 1-RLPC-Carlyle set to reap dividend payout from RAC

(Adds details) By Isabell Witt

LONDON, Oct 2 (Reuters) - Carlyle is set pay itself a 260 million pound ($420 million) dividend from UK roadside rescue business RAC, in a move that could encourage other private equity firms to follow suit after buyout deals dropped to the lowest since 2009.

The dividend recapitalisation - a process that involves debt being added to existing borrowings to pay a dividend - is likely to launch to lenders as early as this week, people familiar with the situation said on Tuesday.

The transaction will involve raising a new 260 million seven-year term loan, paying 550 basis points (bps) over Libor, the people said.

Carlyle declined comment.

Dividend recaps by private equity firms - a prominent feature during the 2006 buyout boom times - have been few and far between this year in Europe as bankers and loan investors worry about taking money out of a business during difficult market conditions.

However, as leveraged buyouts (LBOs) loans dropped to the lowest level in three years, with $14.8 billion in the third quarter of 2012 according to Thomson Reuters LPC, lenders are becoming more willing to provide financing for dividend payouts in an effort to generate fees.

There have been a total of $1.6 billion dividend loans this year in Europe, compared with almost $26 billion in the United States.

European lenders will warm to dividend recaps if companies have shown a strong performance and reduced existing debt, bankers said.

RAC - the UK's second-largest roadside assistance business - has grown its earnings before interest, taxation, depreciation and amortisation (EBITDA) to more than 120 million pounds since Carlyle acquired it in June 2011, the people said.

Carlyle used 620 million pounds of debt to back its leveraged buyout of RAC. This debt has been reduced by a quarter, allowing RAC to add the new 260 million pound term loan.

Interest on RAC's existing term loan B will be increased to 500 bps over Libor from 450 bps. ($1 = 0.6196 British pounds)

(Editing by David Holmes)

((isabell.witt@thomsonreuters.com)(+44 207 542 1886)(Reuters Messaging: isabell.witt.thomsonreuters.com@reuters.net))

Keywords: CARLYLE RAC/