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Saturday, 18 November 2017

Syndicated Loans 2005 - Hot and getting hotter

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Australia remains the hotbed for mergers and acquisitions in the Asia Pacific and banks, beset by a hunger for yield and assets, have been more than ready to bend over backwards to appease asset-buyers. The result? Financings that are more aggressive than ever and that are likely to remain so. Shankar Ramakrishnan reports.

Australian M&A financing dominates the regional market for such deals. Volumes so far this year, at US$15.94bn, have already exceeded 2004's full-year figures of US$15.09bn and are set to climb further.

The continuing growth in M&A volumes has sparked fierce competition among lenders with an increasing number of bankers focusing on M&A financing.

“There is more money to be made in M&A and banks have focused strategies on getting a piece of the M&A pie,” said a senior banker. “Banks are aggressive as a result and because of that, though pricing held up, terms were relaxed and banks have become more willing to provide bridges to back acquisitions, hostile or not.”

Indeed, it has now become par for the course for banks in Australia to write a bridge to back a hostile acquisition and then worry about how it will be taken out later. As was the case with a A$3bn (US$2.3bn) bridge that ANZ and Citigroup provided to back Australian shipper Toll Holdings’ hostile takeover bid for ports operator Patrick Corp.

Such deals are relatively risky for banks because they cannot do a full due-diligence on the target, instead having to rely on public information.

Fosters Group’s A$2.7bn borrowing blitz in June also revealed the aggressiveness among banks in Australia. Citigroup, CSFB, CBA , JP Morgan and Westpac provided a A$2.7bn bridge loan despite questions about the company’s credit fundamentals as international rating agencies knocked its credit ratings down by one or two notches. S&P knocked down Foster’s rating by two notches – noting the company’s increased leverage, the integration risk and its greater exposure to the higher-risk, more cyclical wine industry – while Moody’s reduced its view by one notch.

The bridge was taken out by a £525m (US$930m) one-year, three-year and five-year loan and a US$300m seven-year loan – the first time a BBB– rated Australian borrower had secured seven-year funds from the bank market. The leads raised the balance by issuing two bonds that raised US$1.7bn just three weeks after the takeover’s close on June 3.

Joint leads ANZ and NAB were no less aggressive when they underwrote a A$1.45bn takeover of Affinity Health by Ramsay Health Care. That deal was taken out by a competitively priced A$1.05bn five-year loan that found commitments from 16 banks, while a A$50m five-year tranche and a A$350m one-year tranche were held by the leads.

Another interesting transaction was the NZ$3.4bn (US$2.3bn) share acquisition facility for Rank Group Investments that was secured only over Rank’s shareholdings in three different Australian and New Zealand companies. That deal was underwritten by CSFB. Rank Group Investments is a holding company whose assets include a 57.6% stake in Burns Philp, a 100% of New Zealand Dairy Foods and an at least 50.5% stake in Carter Holt Harvey.

“That was an aggressive deal because so far banks have been willing to underwrite loans that backed acquisitions by investment grade credits but, in this case, it is a company that is unrated but considered sub-investment grade,” said a banker.

Joint lead arrangers CBA, JP Morgan and NAB also showed guts in underwriting a A$2.5bn loan for CLP Australia to back the company’s acquisition of Singapore Power’s Australian assets. Subsequently, of the total facility, the leads syndicated only A$1.6bn while the balance (a A$600m six-month bridge loan and a A$250m one-year working capital facility) was provided by the leads.

Bankers said that most of these deals were helped by a distribution strategy that encompassed not just securing participation from the banks in Australia but also banks in Asia as well.

For years, banks in Australia have been working on building an appetite among Asian banks for Australian credits. There have been several hurdles in the path but slowly these have cleared and confidence in Australian credits among Asian banks is now at a high. All the four Australian bank majors now have distribution teams in Asia.

Part of this appetite for Australian credits is because they are mostly highly rated but still price at a premium compared to similarly rated credits in Asia because Australian credit spreads have not tightened as fast as they have done in Asia.

This, by itself, has emboldened banks in Australia to market credits which were considered risky or tightly priced to banks in Asia and still find a strong appetite.

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