Increasing interest in outbound and intra-regional mergers and acquisitions (M&A) by Southeast Asian corporates will drive bond issuance for the rest of 2012, debt capital market (DCM) sources tell Asiamoney PLUS. They note that a narrowing of spreads between loans and bonds, as well as flexible bond covenants, incentivise companies to tap the local and global bond markets.
Outbound M&A deals by Southeast Asian acquirers reached US$29.78 billion in 2012 year to date, compared to just US$15.32 billion and US$23.95 billion during the same periods in 2011 and 2010, respectively, according to Dealogic.
In a report released by the data provider earlier this month, Dealogic further noted that Southeast Asia cross-border M&A volume reached a record half-year high of US$10.7 billion in the first half of 2012 – nearly three times the US$3.7 billion volume recorded during the same 2011 period. This was fuelled by DBS Group's US$7.3 billion acquisition of PT Bank Danamon Indonesia in April this year, which represents the largest Southeast Asia intra-region cross-border deal on record.
Analysts attribute the surge of M&A activity to the ongoing debt crisis in Europe making global assets cheaper, giving burgeoning companies in the region’s emerging markets a window of opportunity to expand.
While loans have traditionally been the primary financing tool for global M&A, DCM sources foresee the local and global bond market playing a more prominent role for Southeast Asian companies seeking flexible funding options.
“It’s interesting because I’ve met a few Southeast Asian companies recently saying how difficult it is to get a loan because of new capital regulations contributing to the rising cost to loans,” said one Singapore-based debt syndicate source at a European bank, noting that the global credit crisis has put up the cost of lending by international banks by as much as 100 basis points (bp)-200bp in the past year. “M&A requires a lot of funding, and potential Southeast Asian buyers are coming to the capital markets due to a widening between loan and bond spreads.”
While Southeast Asian corporates have the option to turn to cash-rich local banks for loans – which offer competitive rates for short-term borrowers - companies are considering tapping the domestic and global bond markets for their funding needs as bonds offer them a higher degree of flexibility.
“Overall loans are shorter, typically less than three years, usually amortise, and have maintenance covenants to make sure the company that you’re acquiring remains within those constraints on a regular basis,” explains Mark Leahy, head of debt syndicate and debt origination at Nomura. “Bonds are usually longer-term, are non-amortising – you just pay the principal on maturity – and contain incurrence covenants. This means the borrower and creditors understand that there are cashflow uncertainties, but as long as the borrower keeps paying interest and your principal, then the bond remains current. As an asset acquirer you have a lot more freedom with bond lenders than bank lenders.”
Further, at a time when global investors have undergone a flight to quality, Southeast Asian issuers have seen a level of success in the high yield market. Many of the names looking to ramp up their M&A activity are such corproates rated ‘BBB’ and above, Leahy adds, which puts them in a good position to attract investors seeking yield.
This dynamic has encouraged issuers such as MMI International in Singapore and Cikarang Listrindo in Indonesia. Ahead of Cikarang’s issue on February 13, the power producer generated US$4.3 billion of demand for its US$500 million seven-year bond at 6.95%, ahead of the 7.5% guidance. As of the market's close on July 12 the bond was trading at 6.1%.
Bankers from both Southeast Asia- and international-based banks say that clients have voiced their interest in diversifying their M&A financing away from loans themselves. They point to hydraulic-cylinder maker Hyva Holdings – was Asia’s first wholly bond financed leveraged buyout in March last year - as a prime example of how bond M&A financing can work.
While Hyva remains the only example in Asia that was able to execute such a deal, Leahy says that a pipeline is in the works as clients in Southeast Asia and beyond are interested in replicating the deal.
“A lot more of those conversations are going on. Right now 95%-plus of M&A deals are loan-financed, so it will take time to change that dymanic.” he said.
With this in mind, loans will remain the primary mode of funding for most companies in the region, largely due to timing.
“In general it’s difficult to finance M&A with a bond issue because of the execution timing. Loans are probably more suitable to finance the product, though that could change,” said a head of syndicated loans at a Malaysia-based bank.
Yet he notes that greater M&A will still drive bond issuance in Southeast Asia.
“After the initial financing and the initial loan bridge needed to finance the acquisition, it’s pretty easy for companies to look to bonds for the longer-term financing. It varies from corporate to corporate but because loan pricing is widening the bond markets offer a good deal for rated companies.”