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The upside to lower prices

By Pan Yue
12 May 2020

Few bankers, if any, will emerge from the coronavirus unaffected. But leveraged finance bankers have reason to believe they will be able to generate new deals from the chaos — even if they lose a few old ones along the way. Pan Yue reports.

The impact of the coronavirus has been undeniable on Asia’s debt markets. G3 bond issuance in Asia ex-Japan was $43.8bn in March and April, down more than 35% year-on-year, according to Dealogic. Loans volumes, despite usually being slow to react to bad news, have also fallen, hitting $41.7bn in March and April compared to $46bn during the same period last year. The number of deals fell dramatically, from 105 to 54.

Most loans bankers have little reason for cheer at this point. Their clients rely on a customer base that has spent much of the last two months locked up at home.

The Asian Development Bank predicts the region’s developing economies will grow by just 2.2% this year, down from an earlier prediction of 5.5%. Although loan refinancings will still get done, new deals are likely to suffer.

asiaThe one exception to this is leveraged and acquisition finance. It might seem surprising to hear any optimism from leveraged finance bankers right now. After all, companies are likely to want to hoard cash at the moment, not spend it on expensive acquisitions. But there are a few reasons for the positivity.

First, there is already a decent pipeline of deals. Blackstone is in talks with Soho China to take the Hong Kong-listed Chinese property developer private. Singapore-based Canadian International School, which is owned by Southern Capital Group, is also up for sale.

China’s video game developer Leyou Technologies Holdings is in talks with potential buyers, including CVC Capital Partners. The crisis means that new acquisitions might fall through, but bankers at least have existing deals to keep them busy.

“We have a strong M&A financing pipeline but there’s increased caution from both sponsors and lenders,” says Andrew Ashman, head of loan syndicate, Asia Pacific, at Barclays in Singapore. “Investors are focusing on resilient sectors given the current situation — industries with exposure to travel or credits with complex global supply chains are particularly sensitive.”

Adnan Meraj, co-head Asia Pacific syndicated and leveraged finance at Bank of America in Hong Kong, says: “I am of the view the market should end up with higher volume at year end…there are various ongoing sell-side situations, which is encouraging, and bank lenders are not pulling back on the back of strong liquidity.” 

Dry powder support 

The new deals that do come are likely to get a boost from the rise of Asian private equity funds, who can help soften the blow of a global market fall. 

“The local sponsors and Asian sponsors [have started] to bid for Asian assets, and we’ll definitely see that trend continue in Australia and southeast Asia,” says Siddhartha Hari, head of loans and structured credit, North Asia, at Deutsche Bank in Hong Kong. “We haven’t seen that many in China but will start to see more in the next six to nine months.”

The second factor: depressed equity prices will make some deals more attractive. 

This is most obvious for take-privates. For example, Nasqad-listed China Biologic Products Holdings is in talks with banks for a loan of over $1bn to finance its take-private. In February, Hong Kong-listed Wheelock and Co announced its HK$48bn ($6bn) privatisation plan led by its founder Douglas Woo. These deals should, at the very least, offer bankers some respite.

“Many PE funds have a big pipeline of deals which will be impacted,” says James Horsburgh, head of leveraged and acquisition finance, Asia Pacific, at HSBC in Hong Kong. “Deal volumes this year are likely to be driven by sector consolidation, or ownership structure and management succession, or companies which are listed but trading below the book value of assets or at a low multiple.” 

However, bankers are divided on whether there will be a meaningful increase in take-private deals. Although lower equity prices mean privatisation should look more attractive to management, these deals also tend to be slow to put together. That exposes them more to market risk, says Ashman.

One further bit of good news for leveraged finance bankers in Asia: funds in the region have much more money to put to work this year. The amount of ‘dry powder’ — uninvested funds — at Asia-focused private equity funds hit $376bn by the end of last year, according to Preqin.

“Part of the reason for a lack of large sponsor driven deals is due to the competition from strategic buyers,” says Siong Ooi, co-head of debt capital markets, loans and bonds, at MUFG Bank in Singapore. “Strategic buyers are able to integrate acquisitions into the existing business and potentially generate more synergies, meaning that corporates can be more a competitive place for certain types of assets.

“But going forward, and given the amount of dry powder, private equity firms will be more active for sure.”

The good news for the sector is all relative, of course. Leveraged finance bankers in Asia could not be mistaken for bulls. But in a wider market landscape that sees only bad news, leveraged loans bankers can at least point to a few reasons for optimism. GC

By Pan Yue
12 May 2020