Asian leveraged finance is finally finding its feet
A burst of M&A-related financing has put the spotlight on the Asian leveraged finance market, which some still see as a poor relation to its US, European and Australian equivalents. But recent deals show that Asia’s levfin market has been evolving.
Critics of the Asian levfin market pay heed. All is not conservative and dull in the region’s M&A financing market. This is evident in banks’ growing confidence in underwriting more aggressive structures than in the past, pushing up leverage and loosening terms, even amid a fall in pricing.
Banks have also started to add mezzanine pieces in transactions where leverage for a senior portion hits the six times threshold — a substantial increase from the four time leverage that was lenders’ comfort zone until about a year ago.
And as the market heads into the second half of 2017, opportunities are ripe with more leveraged finance loans to support M&A.
For example, banks have recently launched a $235m triple-trancher to support Partners Groups’ secondary buyout of Manila-headquartered SPi Global. Meanwhile, distribution is still going on for a S$178m ($128m) loan for Advent International-backed AL Learning, as the PE fund decides to recapitalise through a borrowing.
At least two high profile levfin deals are also in the works, including a jumbo loan for the acquisition of Singapore-listed logistics company GLP and the potential spin-off of Hutchison Global Communications (HGC).
Each presents unique circumstances around which lenders must build their fundraisings. GLP’s deal, for instance, is complicated by the fact that it owns assets spanning several countries. Banks also have to take into account the diverse nature of GLP’s business, which includes fund management. As a result, sources are expecting GLP’s financing to have various components, addressing each jurisdiction in which its assets are located.
On HGC, one group of lenders is looking to replicate the winning formula for when MBK Partners and TPG Capital clinched the bid for Hong Kong telecom company Wharf T&T. The HK$4.851bn ($622m) senior portion of that deal represented a leverage of 5x and the borrower was able to get one more turn through a mezzanine facility.
Unlike the US market, which has a decades-long tradition of a developed leveraged finance market, offering robust precedents and experience to deploy in structuring new deals, the Asian levfin market is still developing.
The varied and complex legal frameworks governing Asian countries, coupled with the lack of precedents, also makes it harder for banks and law firms to form a clear picture on enforcement scenarios, hampering development of a pan-regional market.
Despite such challenges, market participants say that covenants on some loans in the region are not that far from what is seen in the institutional market in Europe. This at a time when the Asian market, which is predominantly bank and relationship driven, is still fundamentally different from Europe, where a resurgent CLO market and active institutional accounts change the buyer base.
It's worth noting that banks are also increasingly stepping up to execute successful dividend recapitalisations for PE sponsors — something that made lenders balk until a few years ago. This supply has led to hope that more funds, the likes of family offices and hedge funds, will set up shop to play in the Asia syndicated loan market.
Of course, as with most things in Asian loans, there has been no big bang. It's been a steady evolution instead. But critics should note how far it has come.