It hasn’t been the most stellar start for the loan market. Asia Pacific ex Japan volumes are at their lowest level since 2009, and the number of deals signed is at the lowest since 2004. Both Greater China and southeast Asia’s performance have been bleak — with no respite in sight.
But there is one area that has been cooking on gas. Corporate M&A and sponsor-led buyouts have risen steadily since the second half of 2013, and have seen unabated growth into the start of this year as well.
Most eye-popping has been outbound M&A from China: volumes year to date have reached $13.2bn, up 31% year-on-year and at the second highest level on record since 2008, according to Dealogic.
And that is only set to grow as corporates eager to acquire assets start buying, and Chinese companies — particularly those listed in the US —raise funds to buy back their shares and go private.
Three ingredients
But LBOs are still a rarity in Asia. If bankers don’t want to bite off more than they can chew, there are three ingredients their deals should not be without.
To start with, when taking a company private it helps to get a local sponsor. Focus Media’s $1.725bn LBO loan last year was a huge success not only because it had names like Carlyle backing it, but also because of the presence of Chinese private equity firm FountainVest and an affiliate of China’s Citic Capital Holdings.
A local name offers banks more security from potential legal challenges arising from regulatory and capital constraints — which are easier to tackle with an onshore PE partner.
More recently, Giant Interactive’s going-private was via a consortium initially comprising the company’s shareholders and Baring Private Equity Asia. But roughly four months after the announcement, local firm Hony Capital Fund jumped on board the buying consortium.
The second ingredient in the pot should be a domestic lender. The majority of China LBOs end up doing well during syndication thanks to one of the regional banks coming in at the top level. Case in point is Giant’s loan, where China Minsheng Bank and Industrial and Commercial Bank of China (International) are among the seven MLABs leading the deal, due to launch to the market very soon.
Focus Media’s loan, too, had China bank support — critical because their balance sheets offer support to the fundraising, while also providing a certain amount of security among international banks of a timely repayment.
Last but not least is the industry the company operates in. The more cash-rich the sectors, the better, reckon bankers, as it provides assurance that the borrower will always have sufficient cash flow coming in. This means that companies operating across technology, consumer products and telecommunications sectors are better placed to raise funds from the loan market.
With Asian LBO deals starting to stack up, it’s time to get cooking.