Bank lenders are coming under pressure to ease terms as they face greater competition from private credit funds entering the already crowded leveraged finance market in Australia.
As a result of abundant liquidity, private equity firms are seeking higher gearing and lower pricing on leveraged loans. Wealth management group Colonial First State Investments has repriced its Australian dollar-denominated first-lien term loan B of about A$705m (US$469m) after carrying out an identical exercise on a US$618m portion in July, while KKR-backed Arnott’s Group is seeking a A$1.72bn refinancing.
Other financings hitting the market in recent weeks include a A$545m amendment and extension for Patties Food Group and a A$1.45bn refinancing and dividend recapitalisation for Australasian pub, bar and hotel group Australia Venue Co.
“The large international sponsors who are used to more aggressive terms in the offshore markets are pushing for higher leverage, weaker terms, no covenants, with their [private credit] counterparts,” said Bob Sahota, chief investment officer of private credit manager Revolution Asset Management, which focuses on companies in Australia and New Zealand. “In very large deals, there is a lot of competition from international players. There is a lot of capital that is looking for a home.”
Colonial First State shaved 75bp off the margins on both the Aussie and US dollar portions of its covenant-light TLB, while AVC, which is backed by Hong Kong-based alternative investment firm PAG Asia Capital and global PE firm CVC Capital Partners, in late August launched a refinancing and dividend recap that pays identical pricing to a A$900m loan completed in March last year for PAG’s LBO of the business. However, the leverage on the A$1.05bn syndicated portion of the new deal is higher at 3.5x–4x compared with the opening net leverage of 3.25x on the 2024 borrowing.
PAG has also launched the A$545m A&E for Patties Foods that will extend a smaller borrowing from 2022 that backed its LBO of the Australian packaged food business, which owns brands like Four'n Twenty pies. PAG is pushing out the maturity by another five years and seeking to cut the margin by 150bp–175bp from 500bp over BBSY for the revolving tranches and by 175bp–200bp from 550bp over for the term and delayed draw portions of the A$465m five-year borrowing.
In August, EQT-backed health and fitness membership programme Fitness Passport closed a A$500m six-year loan for refinancing a unitranche and dividend recap after attracting three lenders in limited syndication, adding to a dozen underwriters. The loan has a margin of 350bp over BBSY and a leverage of around 5.3x.
“Larger-sized, sponsor-backed deals are attracting lender interest on covenant-light structures, whether it be unitranche or TLB,” said Gautam Rao, head of private equity and structured financing group at Commonwealth Bank of Australia. “That is the playbook for large deals with sponsors at the moment. That is likely to continue.”
He said bank-led deals generally carry two financial covenants but there have recently been some single-covenant deals for strong credits for reputed sponsors.
“Strong credits supported by good sponsors continue to attract the best terms," said Peter Colwell, head of APAC leveraged finance and syndication at Jefferies Australia. “Cov-light loans are becoming the norm for many sponsor deals. The competitive dynamic between broadly syndicated and clubbed loans, including unitranche solutions in sponsor financing, is more balanced in Australia and New Zealand versus the US where broadly syndicated deals have made a comeback,” he said.
In August, Pacific Equity Partners launched a A$696m five-year loan to back the acquisition of Australia-listed building services provider Johns Lyng Group. The loan offers a margin of 375bp over BBSY for the term piece and 350bp for the revolver.
“The middle-market deals with local sponsors that are not large enough for the international private credit funds tend to have more conservative terms that are more in line with bank-style deals – at least one covenant, Australian law and come with more equity contributions to the acquisitions,’’ said Revolution's Sahota.
Permira Advisers-backed I-Med Radiology Network’s A$1.8bn-equivalent loan for refinancing and dividend recapitalisation is an example of a deal that has drawn strong interest from banks as well as institutional investors. The loan has a tenor of three years with two one-year extension options and offers an opening margin of 400bp for the term loan and 375bp for the revolver. The opening net senior leverage is said to be 4.9x whereas it was around 4.5x on a A$690m loan from May 2018 backing the LBO of the business.
“There is low supply of deals in the market and very strong demand to lend and you see it across the whole credit space,” said Alexis Postel-Vinay, head of loans and market financing syndicate for Asia Pacific at BNP Paribas. “It is a good time for borrowers to come to market. Credit spreads are tightening further. The ability for lenders to push back on terms remains very limited in a market where you have many options.”
Opportunities ahead
Amid the slew of repricings, refinancings and dividend recapitalisations, appetite among lenders is also strong for new money deals. That presents a favourable backdrop for private investment firm CC Capital and alternative investment manager One Income Management, which are proposing to acquire wealth manager Insignia Financial Group. They are tapping a A$1.9bn-equivalent seven-year covenant-light TLB split into Australian and US dollar tranches.
Market participants expect a more constructive environment for M&A activity with the Reserve Bank of Australia expected to slash interest rates further this year after a reduction to a two-year low of 3.6% in August.
“M&A activity is increasing and I expect more supply to come to the market over the remainder of the year,” said CBA’s Rao. “The expectation of lower interest rates globally and pent-up M&A demand is likely to drive higher volumes.”
TPG Capital Asia has mandated five banks to lead a loan of about A$400m backing the proposed take-private of Australia-listed flower producer and wholesaler Lynch Group.
Meanwhile, Brookfield Asset Management is running a sale for alternative asset manager and credit specialist La Trobe Financial. The Canadian alternative investment manager, which bought La Trobe from Blackstone for A$1.7bn in 2022, has lined up a staple financing of about A$1bn in the form of a holdco unitranche for the potential new buyer.
“A number of private equity funds are reaching the end of life with sponsors needing to exit assets and show a return to LPs,” said Jefferies' Colwell. “That creates potential new buyside acquisition financing opportunities, whether it is for sponsors or corporates looking to buy those assets.”