Asian leveraged finance must learn to stand alone

  • 28 Jan 2008
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Leveraged loans have been badly hit by the fallout from the US subprime mortgage crisis, but Asian bankers have reason to be cautiously confident about the year ahead, says Tanya Angerer.Few languages have a single word to describe the pleasure derived from someone else’s misfortune. German of course has Schadenfreude while most Asian languages manage with a short phrase to convey the same meaning — xìngzãi lèhuò in Chinese, for instance.

But Asian bankers must be feeling some degree of joy that the credit crisis unfolding around the world is, for the most part, someone else’s problem.

Asian market decoupling theories have peppered Asian financial newspapers since the credit crisis broke. But whether you believe in the theory or not, there can be no doubt that the mood among Asian bankers is considerably lighter than in Europe or the US — and rightly so.

While banks elsewhere were virtually paralysed with billions of dollars of unsold leveraged debt, sponsors in Asia were busy closing deals in the second half of 2007. And banks were still able to take the plunge and underwrite the leveraged loans supporting these takeovers.



Takeovers take off

Any sponsor coverage banker in the region will confirm that buy-out firms are turning their sights eastward.

Kohlberg Kravis Roberts is raising $4bn for a purely Asian fund. TPG, formerly Texas Pacific Group, has gathered $4.2bn for an Asia-focused fund. Morgan Stanley Private Equity Asia has raised $1.5bn for its third fund. And CCMP and CVC Capital Partners are also said to be raising multi-billion dollar Asia funds.

Apart from the funds, many private equity firms have also shown their belief in and dedication to the region through several high powered hires.

Last year Blackstone opened its first office in Hong Kong, naming as co-head Anthony Leung, who was Hong Kong’s financial secretary from 2001 to 2003. And CVC in August hired Francis Leung, the former chairman of Citi Global Markets in Asia. Leung is a well known name who was a long term banker to Hong Kong tycoon Li Ka-Shing and has excellent contacts in Chinese financial markets.

According to data company Dealogic, sponsor-led takeovers in Asia, including Japan and Australia, grew by 27% in 2007 to $12.8bn. Furthermore, in spite of the arid credit markets in Europe and the US, record leveraged buy-outs in Asia were still being announced after the summer. In October, Permira announced the $2.18bn buy-out for Japanese agriscience company Arysta Lifescience, which is the second biggest sponsor-backed buy-out in Japan.

And at the end of September, private equity firm Bain Capital and China’s Huawei Technologies, the network solutions provider, bought US-headquartered voice and data networking company 3com for $2.2bn in cash, which some bankers describe as the biggest leveraged buy-out in China to date. 3com is considered a Chinese company by many because it employs 4,600 of its 6,000 staff in China. Its Chinese business, H-3C, is its most valuable unit with the highest growth.



Reality bites

However, it is not all sweetness and light in the Asian leveraged finance market. The inevitable ripples of the credit crunch are being felt. After all, it is generally the same banks that dominate leveraged finance around the world — be it in the US, Europe or Asia. Losses at these banks translate to a more cautious approach across all territories.

"We cannot hide away from the subprime impact among fixed income investors, though markets in Asia Pacific are technically better insulated," says Derek Armstrong, head of the debt financing group in Asia for Credit Suisse in Hong Kong. "This is not a problem that will go away in a week.

"Banks in general are now more risk-averse and judicious, meaning they are providing financing at lower leverage multiples."

In some respects, the first few months of 2008 will be as different from last year as night and day. The market has become more conservative — meaning lower leverage multiples, tighter documentation and wider pricing.

Asian deals did not emerge entirely unscathed. One deal that was caught out by the change in risk appetite was the $1.1bn facility backing the takeover of Singapore’s United Test & Assembly Center by Affinity Equity Partners and TPG. ABN Amro, JP Morgan and Merrill Lynch won the mandate to arrange the debt financing at the top of the bull run, immediately before worries about the US subprime mortgage market triggered the credit crunch. Consequently, the terms and conditions of the loan were some of the most aggressive ever seen in Asia — the facility even has the dubious honour of being the region’s first covenant-lite loan.

Unsurprisingly, the loan, which did away with regular financial ratio tests and offered less protection for lenders than usual, bombed in syndication.

Even when banks began offering the loan at 95.0 to 96.0 cents in the dollar, a substantial discount to par, in the hope of attracting lenders, still no one bought in. By mid-December the facility had still not received a single commitment.

Other LBO loans also disappointed. Several had to be restructured, such as the £3.67bn loan supporting Tata Steel’s acquisition of Anglo-Dutch rival Corus, and the $2.75bn loan for Melco PBL Gaming Macau.

Although the list of struggling deals in Asia pales in comparison to that in Europe and the US, it would be naïve to think that conditions will not change in the future. But that is no bad thing for the Asian market.

"Terms and conditions for 2008 will not be as crazy," says Tim Donahue, JP Morgan’s head of syndicated and leveraged finance for Asia Pacific in Hong Kong. "Leverage multiples will go down a bit, but I think more of the focus will be on tightening terms and conditions of underwriters, such as requiring business MAC (material adverse change) clauses to be worked into papers."

The MAC clause, noticeable by its absence from some recent loan contracts, allows buyers and underwriters to renegotiate terms or pull out from a deal after terms have been agreed but before the deal is completed, giving some additional protection in uncertain times.

The size of deals may also change.

"Larger sized leveraged finance deals will be difficult to underwrite and get executed moving on," says Farhan Faruqui, Citigroup’s head of global loans and leveraged finance for Asia Pacific in Hong Kong.

"The most dramatic change is that, in the pre-crisis days, banks were willing to take sole underwriting positions. You will still see sole-run deals but I expect there will be a greater share of club deals until the market settles down."

The debt backing private equity firm Carlyle and National Hire’s takeover of Coates Hire demonstrates this point clearly. The A$2.26bn loan, the largest leveraged deal in Australia last year, was mandated after the credit crisis and is being run by ABN Amro, ANZ Bank, Calyon, Mizuho, Sumitomo Mitsui Banking Corp and Westpac. Not only is it being arranged by a very top-heavy group but the usual leveraged finance stalwarts are also noticeably missing from the list of arrangers.



The Asian way, Australia disappoints

With regulatory hurdles to overcome and high price tags attached to controlling stakes, sponsors are beginning to get used to buying minority pieces of an LBO, and the rising cost of debt will fuel this trend.

"Non-traditional leveraged buy-out financings will be something to look out for in the coming year," says Armstrong. "Aside from loan financings, I believe we will see more monetising of equity financing, and pre-IPO investments."

Blackstone took the plunge several times last year in India, such as buying stakes in Hyderabad-based defence supplier MTAR Technologies, business process outsourcing firm Intelenet Global Services and garment manufacturer Gokaldas.

In the case of pre-IPO financing, some Asian firms have been more willing to seek capital injections from buy-out firms or hedge funds with the goal of taking the company public.

The loan supporting the management buy-out of Chinese snack food and beverage company Want Want Holdings is an example of how majority shareholders — in this case, company chairman Tsai Eng Meng — can leverage their equity injection. The $850m 17 month bridge loan managed by BNP Paribas, Goldman Sachs and UBS paid 100bp over Libor, stepping up to 150bp after six months, and again to 200bp after one year.

Most leveraged finance bankers expect this sort of deal to become more frequent over the next year. Other growth markets will be away from the public eye. As the number of hedge funds in Asia has grown so has the number of ways banks can structure deals to meet their clients’ needs — leading to the burgeoning private placement market.

The cookie-cutter method of structuring leveraged deals will wither away as customised solutions become more important, says Armstrong.

One of the biggest hindrances preventing the growth of a leveraged buy-out market in Asia, that mimics Europe and the US where sponsors acquire controlling stakes, is the strength of the equity markets.

"The prospects for Asia’s leveraged finance market depend on the interplay between the equity and debt markets," says Faruqui.

Normally one would expect equity valuations to drop as the ability to leverage transactions is reduced. But this is not at all the case in Asia. Financial sponsors are left in a difficult position, facing rising acquisition valuations as well as higher debt costs.

"There has to be a correction in the equity markets before the Asian leveraged finance market can really take off," says Armstrong. "Strategic acquirers are in a better position now. Not only have they escaped unscathed from the subprime crisis but part of the acquisition currency is in stock, and that clearly has its benefits."

"Some changes that we will notice are that sponsors will start bidding at lower multiples and be more willing to accept lower returns," says Steve Bennett, managing director and head of global leveraged finance for Asia Pacific at UBS.

But in Australia it is a different story altogether. Many leveraged finance bankers at the start of 2007 predicted that Australia would become the real darling of the Asian leveraged finance market. The number of banks with leveraged finance teams in the country has grown over the last two years and dealflow began to follow. But 2007 was full of disappointment. First the takeover of the country’s flagship airline Qantas collapsed in farcical circumstances as shareholder acceptances arrived too late, and then Coles, the nation’s second largest retailer, went to a trade buyer, the Australian conglomerate Wesfarmers.

"In Australia, the institutional markets have a lack of choice of where to put their money to work domestically," says Bennett. "There is no real [domestic] fixed income market and aside from real estate, the domestic equity market is their only avenue. Hence investors do not see much upside in agreeing to a leveraged buy-out and then being left with nowhere else to invest."

This is one of the reasons why Coles went to a strategic acquirer instead, and why the deal was approved by shareholders — investors knew that their money could remain in a publicly listed entity.

"For the next generation, what I expect to see in Australia is structures that will allow institutions to invest in a listed company that will then acquire the target with a financial sponsor, so as to accommodate the fund flow dynamics," continues Bennett.



Coming out of the shadows

One development that some may consider strange is that players that usually stay on the sidelines might come forward to participate more actively in the leveraged market. Those institutions that have not been badly hit by the subprime crisis are already coming out of the woodwork, and this probably signals more of the same to come.

A case in point is the $261m loan launched in November supporting Macquarie Group’s acquisition of two Singapore-based companies — Express Offshore Transport and Miclyn Offshore. The facility is being arranged by Natixis, United Overseas Bank and WestLB.

Another is the S$150m leveraged loan supporting the takeover of precision metal firm Seksun by Supernova, a vehicle for Citigroup Venture Capital International, which is being arranged by Chinatrust Commercial Bank, DBS Bank and UOB. Supernova is owned by several funds led by Citi Venture Capital International.

More traditional arrangers are quick to play down this new form of competition. "More banks may be willing to come into the market," says Citi’s Faruqui, "but it is very unlikely that they will take lead positions on deals."

However the success of a deal is not wholly dependent on the lead banks’ balance sheets. The big deals need syndicating, which is an art that takes years to hone.

The greatest blessing for the Asian leveraged finance market coming out of this credit squeeze is that Asia will learn to stand purely on its own two feet. What usually happens in Asia is that if a deal does not sell well in the region, it can always get restructured to tap the liquidity in Europe or the US.

The debt supporting 3com’s buy-out of a controlling stake in H-3C went down this route. H-3C was a joint venture between 3com and Chinese technology firm Huawei Technologies. Sole bookrunner Goldman Sachs arranged the $430m loan, helping 3com take full ownership of the company. That deal fared badly with only two banks committing and it had to be restructured to attract US investors.

The luxury of relying on overseas markets to shore up debt has vanished and now Asia has to be more self-reliant. "We will see creative ways of debt financing," says Armstrong, "and this will be the Asian way."

Asian leveraged finance bankers that EuroWeek spoke to are cautiously confident about the year ahead. While concerns linger that the industry in Asia is overstaffed, heads have not yet started to roll.

These bankers point westwards, indicating that shedding of teams is likely to be in the more troubled US and European markets. They are probably right. A lot of banks have spent time and energy building Asian teams and it would be short sighted if they started making redundancies too soon. After all, private equity sponsors are turning their attention to the region and deals will surely follow.

While Asian bankers may be rejoicing that their market has not been hit so badly by the credit crunch, 2008 will not be an easy year for the leveraged finance industry, in Asia or anywhere else.

Deals will, in future, be driven more by credit fundamentals than liquidity, which is no bad thing. Share financings, pre-IPO investments and private placements will grow.

But the Asian market is well placed to grow, and if that growth is managed sensibly then the turmoil in the leveraged markets elsewhere should remain that — someone else’s misfortune.

  • 28 Jan 2008

Global Syndicated Loan Volume

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 408,616.30 1152 10.90%
2 Bank of America Merrill Lynch 371,903.67 1183 9.92%
3 Citi 228,819.66 662 6.10%
4 Wells Fargo Securities 209,330.31 765 5.58%
5 MUFG 158,192.59 964 4.22%

Bookrunners of Middle East and Africa Loans

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 6,061.47 20 7.60%
2 HSBC 5,941.43 15 7.45%
3 JPMorgan 5,279.69 14 6.62%
4 Sumitomo Mitsui Financial Group 4,870.55 10 6.10%
5 Mizuho 4,566.75 13 5.72%

Bookrunners of European Leveraged Loans

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 BNP Paribas 18,968.83 86 7.91%
2 JPMorgan 15,967.87 54 6.66%
3 Deutsche Bank 14,910.43 52 6.22%
4 Credit Agricole CIB 13,287.71 61 5.54%
5 Goldman Sachs 12,997.24 58 5.42%

Bookrunners of European Marketed Syndicated Loans

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 BNP Paribas 46,136.68 182 7.00%
2 JPMorgan 44,545.29 93 6.76%
3 UniCredit 35,639.50 153 5.41%
4 Credit Agricole CIB 33,211.72 160 5.04%
5 SG Corporate & Investment Banking 32,419.80 126 4.92%

Syndicated Loan Revenue - EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 18 Apr 2016
1 HSBC 35.45 69 6.71%
2 BNP Paribas 31.67 78 5.99%
3 ING 31.21 74 5.90%
4 Citi 22.60 36 4.27%
5 Deutsche Bank 21.89 32 4.14%