Thursday, 13 December 2018

Barbarians welcome

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Australian loan bankers are hoping that private equity firms will provide a lucrative source of business amid a climate of contracting margins and the emergence of alternative funding for project finance. It seems bankers are only too happy to welcome the barbarians through the gates. Hugh Chow reports.

The Australian syndicated loan market is buzzing in anticipation over the potential business linked to the frenetic acquisitions activity that has dominated headlines there in recent months. The deal which has grabbed the imagination of bankers most has been the anticipated A$17bn-plus takeover of iconic retailer Coles Myer, which could require a debt facility in excess of A$10bn.

The potentially huge funding requirements from this one deal alone is an indication of how leveraged buyouts in Australia have become an increasingly important source of business. While borrowers have never had it so good, bankers still face great competition for few mandates, a process which continues to drive spreads ever lower.

To add to their headache, there are signs that China's insatiable appetite for raw materials is pushing its state-backed banks to secure access to resources in the interests of China's national economic policy, by promising to fund Australian infrastructure projects at bargain pricing.

It is no surprise that bankers are hoping that increasing interest from foreign private equity firms in underperforming Australian corporates will provide a lucrative source of business for some time to come. While the rest of Australia frets over the impact of greater foreign ownership of iconic brands, and the implications of audacious takeover bids backed by ever greater levels of leverage, bankers in Sydney and Melbourne are rubbing their hands in anticipation of the expected fee bonanza.

In the case of Coles Myer, an expected improved bid from a consortium of private equity buyers led by KKR is the latest stage in a game of cat and mouse with Coles' board of directors that could eventually lead to the appearance of a rival consortium, as well as competing bids from trade buyers such as Wal-Mart. This can only be a good thing for bankers as price tension pushes up the price tag – and the size of any debt facility that follows.

At stake are senior roles in an at least A$10bn facility. Bankers are talking excitedly of a “volume premium” to ensure almost universal participation from every lender in town. Even so, syndication will have to go overseas to ensure enough funds are raised. The Coles Myer deal, if it happens, would be the culmination of a year in which private equity firms have stamped their presence on the Australian market.

Even while the latest corporate drama plays out with Coles Myer and KKR, an approximately A$1.5bn six-year facility backing KKR's June A$1.83bn acquisition of Brambles' Cleanaway Australia and Industrial Services Australia businesses is still in general syndication with investor meetings recently held in Hong Kong and Sydney.

In fewer than 12 months, the Australian record for LBOs may leap to a staggering A$10bn-plus from a mere A$545m, as private equity firms turn their attention to bigger acquisitions, while launching bids with increasingly higher levels of leverage.

In March, Newbridge Capital acquired the Myer department stores business from Coles Myer with the financial backing of a six-year A$995m facility. In January, CCMP Capital Asia secured an A$545m-equivalent facility to acquire South African construction group Waco International.

Bankers hope that this type of business will compensate for spread compression that has cut painfully into earnings.

In April, the Perth-based Dampier to Bunbury Pipeline (DBP), the company that operates Australia's longest natural gas pipeline, raised A$580m via a club-style facility to achieve what may have been the tightest margin achieved on a five-year loan taken out by a Triple B rated borrower in Australia. Ten banks committed A$55.5m each to the facility, which paid an all-in of about 51.5bp over BBSY.

To make matters worse for lenders, borrowers believe they can now fund some projects from alternative sources. Little known Perth-based Yilgarn Infrastructure, is hoping to finance a rail and port project in Western Australia using cheap funds from Chinese state-backed policy banks.

Some A$1.5bn of the anticipated A$2bn project may be funded by lenders such as China Exim Bank and China Development Bank, pending satisfactory feasibility reports, based on interest rates of some 6% per annum for 10 years or more. A similar project would likely pay an all-in of 8%-9% for 10-12 year money in the Australian syndicated loans market.

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