Asia bridge-to-bonds: promising, but risky
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Asia bridge-to-bonds: promising, but risky

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The growing popularity of bridge-to-bonds in Asia offers banks opportunities, but is not without its risks

A relatively novel deal hit Asia’s loan and bond markets recently.

Last week, US private equity firm Carlyle Group added to deal flow in the Asia bond market by raising $1.01bnto support its acquisition of Indian IT company Hexaware Technologies. The deal was well received by investors, with books touching $7.8bn at final guidance, GlobalCapital Asia reported last week.

It may sound standard enough, but the bond outing followed a $1bn bridge loan first sealed by Carlyle in September to finance the Hexaware buyout. But the loan was never drawn down, and ended up being cancelled after the sponsor printed the bond.

This bridge-to-bond structure is not unheard of in the region, but it is different from the usual bridge loan facilities commonly seen in the market.

Normally, companies raise a one or two year bridge, use the proceeds to fund the acquisition, and later raise other long term financing — either a longer tenor loan osealed by Carlyle in Septemberr a bond — to repay it.

The loan-to-bond bridge is provided because acquisitions usually require the buyer to have committed funding in place, that can be used as a backup if the planned bond issuance does not happen on time. The intention of the structure is to incentive the borrower to issue a bond as soon as possible, because a penalty will apply if the company draws the bridge loan.

The structure has been seen before. For instance, as early as 2012, Vedanta Resources raised a $1.5bn bond-bridge as part of its financing package to support its acquisition of Carin India. That bridge was also cancelled after Vedanta raised a $1.65bn bond.

Loans bankers reckon this structure is growing in demand in the region.

The leverage ratio on sponsor deals has been getting higher and exceeding six times, while the required funding size is also getting larger, from around $200m a few years ago to as high as $1bn-plus this year. All these factors require the bond market’s support for a future take-out.

It is still good business for the loan market, of course, especially for many investment banks that do not have a big balance sheet to play with. They earn the fees on committing to a bridge loan, without actually having to deploy the money in most cases.

But there are risks attached with growing more reliant on such a structure.

Although both Vedanta and Hexaware bond deals were successful, companies and banks should bear in mind that it may not fit all situations.

Both Vedanta and Hexaware, for starters, were already familiar names among investors. They have global operations too, critical for ther deals’ successful execution.

However, companies that have never been in the bond market before may not be able to enjoy the same reception. And that may be the case for many leveraged buyout situations, as the sponsors have been shifting their focus to the technology sector and growth-stage companies that haven’t accessed public capital markets before.

In addition, another risk is the constant change in market conditions.

The bridge-to-bond facility is provided with the expectation that the bond market will be open, and the deal will be executed on time. However, if the market changes suddenly — like seen both this year and in 2020 due to the Covid-19 pandemic and rates movement — the company may end up facing funding pressure. It will need to come up with other financing solutions quickly, and may even have to pay up further to access its bridge loan.

The advantages of these structures are many — and the market’s growing interest in these formats reflects the sophistication of the bond and loan markets in Asia.

But a cautious stance on the structure can go a long way towards ensuring the product grows further — for the right credits.

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