Tuesday, 16 October 2018

Syndicated Loans 2005 - Asia enjoys return of M&A

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2005 has been the classic curate’s egg for Asian loan markets – good in parts. Volumes in some markets have fallen as some borrowers have reined in borrowing, but those who wanted money have been able to access cheap funding. The good news has been the growth in higher-value transactions such as acquisition financings. Jonathan Rogers, Shankar Ramakrishnan, Prakash Chakravarti and Patricia Lee report.

There is no question that the one development that has most pleased Asia’s loan bankers in 2005 is the growth of acquisition financing. Until this year, only Australia had seen a steady flow of such deals, with Asia (ex-Japan) seeing only sporadic issuance.

However, this year has been different. Australia still tops the year-to-date acquisition financing tables, but other markets are also getting into the act. Ex-Australasia acquisition volumes have reached US$5.63bn – their best since year 2000. Unlike in the past, activity this year has been more widespread, including deals from such apparently unlikely markets as India and Philippines.

“We are seeing quite a broad representation of acquisition financing opportunities in the region and we expect to see strong activity for the next couple of years,” said Clarence T’ao, head of Asian acquisition finance, loan structuring & syndication at BNP Paribas in Hong Kong. “New private equity funds are being established on a regular basis and these are looking for the right opportunities to invest in. With both private equity firms and companies competing for the same targets, we expect opportunities for leveraged buy-outs too.”

The main reason for the upturn in such deals in Asia is that Asian companies are expanding overseas and looking to acquire assets to do so. This is in contrast to the last few years when Asian companies, still recovering from the Asian crisis – at least psychologically – and not sure about the global economic outlook, focussed more on deleveraging and strengthening their balance sheets than on capital expenditure or asset acquisitions.

This year has been a different story and the turnaround could have been even more dramatic, particularly for China, had CNOOC’s US$18.5bn bid for Unocal and Haier Group’s US$2.25bn bid for Maytag Corp been successful. CNOOC’s takeover of Unocal would have been the largest overseas acquisition by a PRC company and would have led to the largest acquisition financing from Asia, while Haier’s bid would have led to the first Chinese LBO. While those efforts were unsuccessful, they nonetheless demonstrated PRC firms’ voracious appetites for overseas assets – particularly oil and gas firms in pursuit of energy sources – after Lenovo Group had kick-started the activity earlier this year with its acquisition of IBM’s PC business, via a US$600m financing arranged by BNP.

Acquisition financing in the Philippines and India has also been a revelation. San Miguel Corp put Philippines on the acquisition map with a US$1.15bn bridge financing in May that funded its acquisition of Australia’s National Foods, while Indian companies have also been busy.

Deal flow has been steady in 2005 with transactions for GE Capital International Services, UB Group and Matrix Laboratories. Matrix’s €165m (US$198m) financing marks the largest deal for an Asian pharmaceutical company, but that could soon be trumped by an acquisition financing from Wockhardt that is expected to be at least US$400m in size.

Hong Kong, Singapore and South Korea have also seen decent deal flow this year and the trend is expected to remain strong in 2006. Hong Kong’s Johnson Electric is close to completing its CHF695.9m (US$538m) acquisition of European company Saia-Burgess, while the acquisition of Ssangyong Motors by Shanghai Automotive in January was the highlight of activity in South Korea.

Another key trend in 2005 has been the ever more obvious return of Indonesia to Asia’s bank market. Lending to Indonesia has never been for the faint-hearted, and until recently it appeared that it would remain a minority pursuit. But after Susilo Bambang Yudhoyono was swept to power last October, Indonesia suddenly reappeared on Asian bankers’ itineraries again.

Last year, US$2.7bn of deals was booked, with US$1.2bn of that coming after Yudhoyono’s election victory. Momentum picked up even further in 2005 and, although the volumes registered in the first three-quarters more or less match the same period last year, this doesn’t account for a full pipeline, including a chunky US$600m deal from Arindo Global.

Steadily declining pricing has perhaps been a more telling indicator of bankers’ renewed enthusiasm for lending to Indonesia, as has the increasing willingness to lend on a pure corporate basis.

The pure Indonesian offshore corporate market was reopened in September last year by Astra International’s US$120m and Rp600bn revolving facility. Pricing was Libor plus 265bp to the top in reflection of the deal’s breakthrough status for the country’s corporate market as well as Astra’s emergence from restructuring. Such was the overwhelming responses that the US$50m greenshoe was exercised and the deal upsized.

Barely one year later and Astra subsidiary United Tractors is in the market with a US$125m dual-tranche facility that pays Sibor plus 208bp to the top.

Other examples are provided by several Bakrie family companies. Kaltim Prima Coal, for example, borrowed US$404m at medium-tenors paying as high as Libor plus 1600bp in late 2003, but has since successfully refinanced this and raised new money at much lower costs. The Bakries have also managed to raise funds this year for other companies in their group, including a US$275m five-year project finance-style loan for Energi Mega Persada that pays Libor plus 500bp all-in and a US$143m 3.5-year deal for Henry Walker Eltin which pays Libor plus 550bp all-in.

But this downward pricing momentum appears to have the brakes put on it by a round of downside volatility on the rupiah in late August together with a near meltdown of the domestic bond markets and a consequent rise in short-term SBI rates. As a result, there were various casualties among deals that had started well but hit a wall of resistance in syndication. For instance, the senior secured US$600m Arindo Global deal to fund the purchase of Indonesia’s biggest coal mine paying 400bp for 2.5-year average life managed to attract just two banks at the top in syndication. Similarly a US$72m four-year deal for paper company Fajar Surya Wisesa was a rough ride.

Elsewhere, though, markets have been less exciting. Look, for example, at Malaysia and Taiwan. These markets are obviously distinct but the same trends have played out in both. As usual, the numbers tell the story, showing that actual deals have held up reasonably well, but that total issuance has been slashed.

According to Thomson Financial, 137 loan deals totalling US$19.6bn were signed in Taiwan in the first three quarters of last year, while in the same period this year there have been 105 deals, raising just US$10.9bn.

Similarly, in Malaysia, a total of 20 loans worth US$5bn were raised in the first three quarters of 2004, compared to 15 deals totalling US$3.9bn sealed in the up to the end of the third-quarter this year.

Such a decline in loan volume shows that tight pricing does not necessarily provide an incentive for borrowers to tap the bank market. It also means that, if first-tier borrowers (such as the Usaha Tegas Group in Malaysia and Taiwan's Formosa Group) have no current need for cash, banks have no choice but to turn to those who do: often second and third-tier borrowers.

As a result, in the absence of quality borrowers, second and third-tier corporates have been able to raise funds at attractive rates with strong bank support.

Titan Chemicals, for instance, recently returned to the market for a US$460m loan after completing a US$700m deal just eight months ago. The latest deal, which is divided into a 4.25-year term loan and a 6.25-year revolver, has produced an enormous cost saving for Titan, with pricing on the respective tranches at 80bp and 105bp respectively. All-in pricing to the market is being finalised – the deal has still not been launched – but it is expected to be slightly north of 1%. This compares to the all-in yield of 276bp on the US$700m 3.3-year (blended average life) loan from the beginning of the year.

Similarly, Kumpulan Guthrie took advantage of these dynamics by returning for a US$380m seven-year amortising loan in June that, compared to its earlier deals, stretched both pricing and tenor. The transaction pays 64bp all-in to top-tier banks, compared to Libor plus 170bp on the borrower’s five-year US$230m loan sealed in 2003.

And, although pricing has halved, Guthrie's US$380m loan saw strong support, with the US$725m received at the sub-underwriting stage enabling an upsize to US$480m.

Banks have also proved to be particularly receptive towards credit from industries, such as construction, they previously shunned. Three Malaysian construction companies came to the market this year including Gamuda and WCT Engineering which are jointly raising a US$72m three-tranche facility now in syndication, and IJM Investment (Labuan) which signed a US$100m seven-year amortising loan – upsized from US$80m – in August.

Similarly in Taiwan, second and third-tier corporates are the biggest gainers under present market conditions. At least half of the borrowers that tapped the loan market this year were small and medium sized enterprises.

Such borrowers used to have a hard time accessing Taiwan’s syndicated loan market, but not any more. Many are now getting competitive offers and securing pricing in the range of 80bp–100bp for five-year deals that are below NT$3bn (US$90m) in size. This is a far cry from the past when their funding needs were met largely through bilateral loans.

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