Taiwan Capital Markets Deal
Taiwan’s highest-profile acquisition financing of the year ended smoothly in September, though the deal it backed was anything but easy. For overcoming all hurdles, the NT$31.18bn financing backing Ruentex’s buyout of Nan Shan Life is IFR Asia’s Taiwan Capital Markets Deal of the Year.
The closing of the NT$31.18bn (US$1.0bn) buyout financing for Nan Shan Life Insurance in early September 2011 marked the end to an eight-month syndication process and the completion of an acquisition two years in the making. The warm response from 22 lenders suggests the syndication was a cakewalk, but Nan Shan’s new owners had to cope with minimal support from foreign lenders and keep their local backers engaged in drawn-out negotiations with Taiwanese regulators. To complicate the selldown further, two of Taiwan’s biggest lenders were absent, having backed rival bidders.
Bidding for the asset picked up steam in the first half of 2009 when AIG, under pressure to sell assets to repay bailout loans from the US Government, put its 97.57% stake in Nan Shan on the block. Four bidders entered the fray, including private-equity firms teaming up with other domestic companies, despite the Taiwan Government’s insistence that any potential buyers be long-term strategic investors that would not just flip the investment a few years later.
Primus Financial, an Asian PE firm, teamed up with Hong Kong-listed battery-maker China Strategic to emerge the winner for a US$2.2bn price tag, but that deal fell apart more than a year later after Taiwanese regulators quashed the sale. A few months later, in January 2011, AIG agreed to sell its entire stake in Nan Shan to Ruen Chen Investment Holding, an acquisition vehicle set up by conglomerate Ruentex Group (80%) and Taiwan-listed shoemaker Pou Chen Corp (20%).
Six domestic banks provided a NT$40bn seven-year underwritten loan to back the buyout and launched the deal into syndication at a maximum size of NT$33.5bn.
Despite the uncertainty over regulatory approvals, when the deal got the go-ahead in late July, 16 more banks had joined in general syndication – impressive given how aggressively the deal was structured.
To begin with, foreign lenders stayed away from the financing – partly because of the aggressive terms, but, more importantly, because the underlying asset was a tricky one to value.
Nan Shan was in the red and not expected to turn a profit for at least 18–24 months from when it was put up for sale. The low-interest rate climate in Taiwan, coupled with guaranteed returns and high yields to policyholders, left insurance companies in a squeeze.
The deal’s pricing was also not rich for a leveraged financing. The margin of 270bp over the secondary CP rate, combined with fees of 20bp, translated to an all-in of 275.71bp over – a pittance relative to leveraged financings around the region.
The deal was competed with a NT$45.25bn seven-year loan for Want Want Holdings, which agreed to acquire China Network Systems for around NT$61bn in late 2010. Want Want’s acquisition financing paid a more attractive pricing of over 300bp all-in.
Nonetheless, domestic lenders understand the insurance business well and Nan Shan covers one sixth of Taiwan’s population. Moreover, the deal’s careful structure included enough safeguards in the loan to attract banks to come into it.
For instance, Ruen Chen could not borrow any money from Nan Shan and the latter could not invest in any shares Ruen Chen or any other related third parties issued unless the Financial Supervisory Commission approved. In addition to the purchase price, Ruen Chen was also required to provide a US$1bn asset, including US$200m in cash, for an FSC-assigned trust account. Of the purchased shares, 70% were to be put into a trust and could not be traded for 10 years. The gearing could not exceed 48% as of the transaction date, with the ratio to be reduced by an agreed percentage each year.
Taiwan Cooperative Commercial Bank, Land Bank of Taiwan, First Commercial Bank, Bank of Taiwan, Mega International Commercial Bank and E Sun Commercial Bank were the mandated lead arrangers and joint bookrunners on the deal.