Trimco TLB divides lenders
A term loan B of around US$550m for garment label maker Trimco International Holdings being targeted at bank lenders in Asia is drawing a mixed response due to it not having an external credit rating and its covenant-light structure.
Brookfield Asset Management, which acquired Hong Kong-based Trimco from Affinity Equity Partners in November 2022 for an enterprise value of US$850m, is in talks with prospective lenders for the five-year TLB, according to people familiar with the matter.
The deal is likely to comprise a term loan tranche, a delayed draw term loan piece and a revolving credit facility. Proceeds will be used to refinance debt and fund a dividend recapitalisation.
TLBs are typically targeted at institutional investors, carry long tenors and no financial covenants, and come with little or no amortisation. Large TLBs that require liquidity from multiple regional markets often carry external credit ratings that help in risk assessments for investors lacking a close relationship with the borrowers.
“Collateralised loan obligations require ratings, so deals that are syndicated in the US market with CLO investors would need to be rated,” said a Sydney-based banker at an international bank. “But for private credit funds and Asian banks, it’s not a requirement.”
Price talk for Trimco’s TLB indicates an opening interest margin in the low to mid 400s, which could be too low for some private credit funds, meaning that the deal may have to rely heavily on support from the bank market.
However, while most private credit funds do not require an external rating for TLBs, some banks deem it a crucial indicator.
“When evaluating a TLB, the external credit rating is one of the key factors that we must consider,” said a loan banker from a Taiwanese commercial bank. He said that the bank also only considers TLBs that are backed by sponsors it is familiar with.
One example of an unrated TLB is a A$700m (US$440m) financing backing Pacific Equity Partners’ LBO of Singapore Post’s Australian business Freight Management Holdings. The deal closed to a strong response in March leading to the five-year and six-year tranches pricing at interest margins of 400bp and 450bp over BBSY/BKBM for Australian and New Zealand dollars respectively – inside the launch levels of 425bp and 475bp. Thirteen international banks joined the deal, as well as 11 non-bank investors in Australia and Asia.
According to Andrew Ashman, head of loan syndicate for Asia Pacific at Barclays, the “Asian investor base has more experience processing unrated loans. Most lenders in this region have dedicated credit teams that will analyse the credit in detail over a longer time period. Because of that focus on diligence in-house, there is less need for support from an external rating provider in APAC than you might see in other markets.”
Silver lining
Some bankers also suggested that the lack of an external credit rating could be advantageous in some situations.
“The decision of not obtaining a rating may not be totally negative,” said a Hong Kong-based syndicated loan department head. He explained that, if the external rating is below BB−, the loan will be assigned a 150% risk-weighting according to the standardised approach to assess credit risks under the Basel framework. For an unrated borrower of similar credit profile, the risk-weighting could be lower.
According to the Sydney-based banker, “having a rating means you have another stakeholder that you need to appease. So if they can get away without one, it makes it easier.”
However, he also said that in the case of rated cross-border TLBs, borrowers can maximise the liquidity pool by having investors in Asia and the US compete against each other and use the arbitrage to achieve better pricing. These benefits extend beyond just one deal when the borrowers want to refinance or reprice the deals later.
He highlighted TLBs priced recently for KKR-backed food company Arnott’s Group and Australian wealth managers Colonial First State and Insignia Financial as examples.
Last month, Insignia raised a A$1.93bn-equivalent seven-year TLB – the biggest LBO loan from Australia this year – with a larger Aussie dollar tranche than planned. In October, Arnott’s raised a US$1.14bn-equivalent financing in Australian and US dollars, increasing the size of the latter tranche. It followed a US$1.09bn-equivalent TLB Colonial First State closed a few weeks earlier with the US dollar portion being increased to US$618m from US$568m at launch.
For Trimco, Brookfield can look to Carlyle Group’s experience with a US$605m TLB that closed in 2022 for its LBO of China’s HCP Packaging, the first such borrowing to be distributed only in Asia (excluding Australia). That deal, although rated, was exclusively syndicated in Asia and relied heavily on bank lenders, similar to what Trimco is trying to do. It closed with a dozen lenders joining.
In early November, HCP completed a refinancing of the TLB, according to a report from Fitch, which upgraded the borrower to B− from CCC+. The refinancing reduced the balance and switched the interest of a second-lien TLB portion to payment-in-kind, and extended the maturity of a revolving credit facility from 2027 to 2029.