(Adds details, background) By Isabell Witt
LONDON, Oct 4 (Reuters) - Carlyle Group plans to add 260 million pounds ($418 million) of debt to its UK roadside rescue business RAC to pay itself a dividend, in a move that could encourage other private equity firms to follow suit amid a dearth of buyout deals.
So-called dividend recapitalisations - which involve debt being added to existing borrowings to pay a dividend - were commonplace during the buyout boom years of the mid 2000s.
But they have become a rare sight in Europe since the start of the 2008 financial crisis as lenders have worried about money being taken out of businesses.
If the transaction completes successfully, other private equity firms could follow suit, bankers said, as leveraged buyouts (LBO) have dropped to their lowest level in three years.
With a mere $14.8 billion of new LBO loans in the third quarter of 2012, according to Thomson Reuters LPC, banks are under pressure to make money and becoming more willing to provide financing for dividends if a company performs well.
Carlyle said on Thursday BNP Paribas and Deutsche Bank were the main coordinators of the loan. Bank of America Merrill Lynch, Credit Suisse, HSBC, JPMorgan and UBS are also bookrunners on the transaction.
Carlyle, which bought RAC in September 2011, said it was undertaking the dividend recapitalisation after RAC grew its earnings before interest, taxation, depreciation and amortisation (EBITDA) to 136 million pounds in the year ended of August.
It has also reduced its debt from 5.5 times earnings last year to 2.8 times earnings.
The 260-million-pound loan will pay an interest margin of 550 basis points (bps) over Libor and mature in 2019.
Lenders to RAC's existing debt will have to agree to the transaction by Oct. 19 and will receive a 50 bps fee and a 25 bps interest margin increase on the current term loan B.
There will be a 75 bps margin increase on the existing revolving credit facility.
($1 = 0.6222 British pounds)
(Reporting by Isabell Witt; Editing by Jane Merriman and Mark Potter)
Keywords: CARLYLE BANKS/