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Friday, 17 November 2017

Asia delivers on LBO promises

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2006 will be seen as a watershed year for the Asian syndicated loan market. After much hype, leveraged finance has finally taken off and seems destined to grow in the coming years. This is great news for lenders, not only in terms of increased deal flow but also more opportunities for career advancement as investment banks set up leveraged finance desks in the region. Prakash Chakravarti, Shankar Ramakrishnan, Hamisah Samad, Cong Cong Tang report.

These increased opportunities for leveraged finance are not surprising given that Asian companies, particularly Chinese and Indian corporates, are on an overseas acquisition spree.

Additionally, global private equity houses and venture capital firms have set up shop in Asia as part of their relentless hunt for good returns. This has led to an increase in LBOs, which has prompted investment banks to follow them into the region to help finance these deals.

While in the past Japan, Australia and South Korea were the most active markets for LBOs, followed by Hong Kong and Singapore, 2006 has seen non-traditional markets such as China, India and Philippines take centre stage.

Indeed, the US$181m five-year LBO financing for China's GUM Holdings in September and the US$368m seven-year loan for Software Development Systems (SDS) in India a month earlier are seen as groundbreaking LBO transactions in those countries. The success of these two deals demonstrated that LBOs could be done despite the numerous hurdles these countries' regulators posed.

GUM Holdings’ success is particularly significant given the poor record of Chinese buyouts succeeding. A notable such example is the US$282m five-year LBO financing for Harbin Pharmaceutical Group Holding that was cancelled in March 2006 after having been in the market for more than three months. Cancellation came about because of unexpected changes to PRC securities laws relating to general offers for listed companies in China. While it might have been a blow to mandated lead arranger Citigroup, the cancellation did highlight the challenges involved in doing LBOs in China.

The story has been similar in India. Up until the close of the US$368m LBO for SDS, not many bankers felt the country had a regulatory regime fertile for LBOs. But the deal had a simple yet clever structure that enabled it to get around regulations relating to dividend repatriation and showed that LBOs could be done in India too.

“The success of these deals does not mean there will be a deluge of such transactions," said one Hong Kong banker of developments in China and India. "But they nonetheless represent small and significant steps for the long-term growth and development of LBOs in these markets.”

Many believe the Philippines, which poses fewer regulatory obstacles than China or India, should see more LBO activity. But there have been few M&A situations that have led to LBOs. All eyes are now fixed on developments surrounding the sale of Mirant Asia Pacific’s power generation assets in the Philippines because it is expected to result in the largest LBO out of the country.

Taiwan has also appeared on the LBO map with bankers now focussing on the sale of an 80% stake in China Network Systems, the country’s largest cable television operator, by the Koos Group. After an initial round of bidding in which several private equity bigwigs such as KKR and Macquarie express interest, two bidders have been shortlisted for the stake, which could result in the largest LBO from Taiwan. The winning bidder is expected to raise NT$30bn–NT$40bn (US$913m–$1.2bn) to pay for the acquisition.

South Korea, traditionally a strong LBO market, has disappointed leveraged financiers, particularly as some winning bidders on M&A transactions have opted for bonds rather than loans to fund their purchases. However, the country has still churned out a couple of LBOs this year, including the W113.8bn (US$119.8m) senior secured facility for CCMP’s buyout Buy The Way chain, which is in syndication.

Bankers are also hopeful that other acquisitions will be financed via the loan market. One such possibility is E-Land’s W1.75trn (US$1.83bn) acquisition of the local operations of French hypermarket chain Carrefour, for which around W800bn has been provided as a bridge that is expected to be taken out soon.

Other possibilities are Shinsegae, which has acquired the Wal-Mart chain's local operations for W825bn, and Kumho Asiana Group, which is the preferred bidder for construction firm Daewoo Engineering & Construction with a W6.6trn offer. Both firms could tap the loan market but neither has yet declared their intentions.

Malaysia too is seeing its fair share of acquisition financings. The latest is gaming company Genting’s £639m acquisition of UK-based Stanley Leisure. Genting has already secured a one-year bridge facility of £368m from five banks.

Genting’s bridge comes on the back of a US$1.4bn 364-day loan for Bumiputra-Commerce Holdings (BCHB), which refinanced a M$4.7bn (US$1.28bn) one-year bridge facility that part funded BCHB’s acquisition of Southern Bank.

In Singapore, PSA International’s US$3.42bn multi-tranche, multi-currency loan, through mandated lead arrangers Barclays, DBS Bank and RBS, is the largest syndicated loan by a Singapore corporate in recent times. Proceeds will finance PSAI’s acquisition of a 20% interest in Hutchison Port Holdings and Hutchison Ports Investments.

“The Singapore loan market this year has managed to deliver the biggest loan in non-Japan Asia with PSA International, highlighting the considerable liquidity that exists in this market,” said Richard Palmer, head of loan origination and structuring, Barclays Capital Asia Pacific.

Ramping up

With such frenetic M&A activity around the region, it is no surprise that investment banks are ramping up their lending capabilities. Bulge bracket firms such as Goldman Sachs, Merrill Lynch, Morgan Stanley and UBS, which are not generally as active in the Asian loan markets as they are elsewhere in the world, have been chasing loan talent to tap the new lending opportunities in the region.

Loan bankers are having the time of their lives as this new demand for skilled professionals is leading to more opportunities for career advancement. There has hardly been a bank on the street that has not been affected by personnel moves.

Despite this distraction, Asian (ex-Japan, ex-Australasia) loan volumes continue to be robust, having crossed US$104bn until mid-September this year. This is almost 20% higher than the US$87bn worth of loans done in the same period of 2005, which in itself was the best year since 2000, according to data from Thomson Financial. Loan volumes in 2006 seem set to eclipse the US$114.49bn seen in 2000.

As always, Hong Kong continues to lead the list having transacted US$25.73bn in volumes through 65 loans until mid-September followed by Taiwan with US$21.88bn through 166 deals. Taiwan’s volumes, however, are largely driven by domestic currency borrowings with very few opportunities for foreign lenders. Singapore too has seen strong volumes of around US$13.77bn – nearly double the US$7.7bn raised in a lacklustre 2005.

“This year Hong Kong has seen a good mix of transactions including blue chip refinancings, red chip loans, mid-cap fundraisings, non-recourse property sector loans and acquisition and project financings. REIT loans in particular have been a particular growth sector of the market and has added diversity to the deal flow,” said Phil Lipton, managing director and head of syndicated finance, Asia Pacific, HSBC.

While traditionally strong markets like South Korea and Malaysia have seen volumes taper off – the two countries lag in sixth and eighth position respectively – those such as India, Indonesia and Philippines have had a strong year.

India, in particular, looks likely to finish with record volumes. By mid-September Indian corporates had already borrowed US$11.33bn via 71 loans and with another US$4bn worth of loans in the market, India is expected to end up third behind Hong Kong and Taiwan, eclipsing China and Singapore.

Despite increased volumes liquidity remains abundant and lenders’ hunger for assets continues to drive pricing down. This is evident across most markets as borrowers continue to push the envelope further taking advantage of the benign conditions.

This is especially true for loans for Hong Kong and Indian borrowers. For instance, Swire Pacific tapped a HK$3.5bn five-year loan in August, which was increased from HK$3bn despite paying a tight top level all-in of 24bp over Hibor. The tone for tight pricing in Hong Kong was set by Sun Hung Kai Properties in March when it raised HK$12bn through a five-year loan a top level all-in of 29bp over Hibor.

Indian borrowers are notorious for their tightly priced loans. Tata Steel’s US$750m seven-year loan (with a US$150m greenshoe) paid just 52bp over Libor in general syndication. Under normal circumstances, there should have been resistance to this kind of pricing, especially since Tata Steel has regularly borrowed in the past 12 months. However, the deal already has nine banks in the arranger group.

Elsewhere, the US$250m five-year amortising facility for San Miguel Corp from the Philippines is another example of aggressive pricing. The deal pays an all-in of 78bp over Libor to sub-underwriters – less than half the top level all-in of 167.86bp paid on the US$300m five-year March 2004 financing that is being refinanced.

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