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In an increasingly interconnected and globalised world, Asia cannot escape the effects of any crises in other regions. The eurozone crisis has been a huge overhang on financial markets and the resulting squeeze in liquidity has hurt many borrowers with the cost of funding rising to prohibitive levels.
However, equity valuations have also taken a beating, and there are opportunities for bargain hunting that could lead to more M&A activity.
“Asian M&A volumes have seen a resurgence in 2012 compared with 2010 and 2011. This year is clearly better in terms of number of deals and larger deal sizes as Asian corporates with strong balance sheets and a good following in the banking community look to make big-ticket acquisitions. Equity valuations are depressed generally and economic slowdown at home is forcing Asian companies to look at inorganic growth opportunities overseas,” said Birendra Baid, director, head of loan syndication, Asia at Deutsche Bank.
Scrambling for a piece of the action
The bank market is already salivating at a handful of big ticket M&A situations, including a scramble for a piece of the action on a £680m financing for China’s Bright Food, among others.
At the time of going to press, more than a dozen lenders were vying for a lead role on the financing, which backs the Shanghai-based state-owned company’s purchase of a 60% stake in British cereal maker Weetabix.
The huge interest in Bright Food’s acquisition loan is not surprising. The first quarter of the year hardly recorded any financing activity as the market began to feel the after-effects of the retreat of European banks from the region late last year.
Moreover, with the Lunar New Year holidays in late January, even general lending experienced a slowdown in the first two months of the calendar year.
“Asian M&A volumes have seen a resurgence in 2012 compared with 2010 and 2011. This year is clearly better in terms of number of deals and larger deal sizes as Asian corporate with strong balance sheets and a good following in the banking community look to make big-ticket acquisitions”
“A general lack of corporate and project-style loans from Asia this year means that lenders are hungry to participate in M&A financings, which yield better returns. The outlook for the next two quarters for M&A financing from Asia is promising,” said Baid.
Alibaba Group’s success in luring lenders – its US$3bn dual-tranche loan saw 14 banks committing US$2.5bn in syndication – proves that financings, if appropriately structured, can get done, even in tough market conditions. And this was a borrower from the internet sector making its debut in the loan markets.
Sole underwriters a thing of the past
Indeed, it also brings to light another dynamic. Multi-billion dollar loans now need a handful of banks underwriting them. Alibaba’s deal had six underwriters and it was at a US$4bn size in early December when it first emerged. However, tight liquidity and the rising cost of funding following the retreat of European lenders back to their home markets forced Alibaba to cut the size.
The days of sole underwritten multi-billion dollar loans to back acquisitions seem to be over. Even blue-chip names such as Hong Kong Exchanges and Clearing, which is bidding for London Metal Exchange, mandated three banks for a US$2bn bridge.
A loan of up to US$2bn loan for Tata Communications backing its bid for Cable & Wireless Worldwide saw five banks joining hands to underwrite the deal in April. The financing did not materialise after the Indian company withdrew its bid.
This is a marked departure from the pre-crisis days when tens of billion dollar acquisition loans were put in place with individual banks underwriting huge chunks.
Even in 2010 and early 2011, a couple of M&A situations such as Bharti Airtel’s takeover of Zain Africa and Vedanta Resources’ acquisition of a controlling stake in Cairn India led to multi-billion dollar loans that saw Standard Chartered underwriting the bulk of the financing.
Clearly, putting together big-ticket financings is tougher in the current environment.
“Previously, funding an M&A trade with a long-tenor borrowing [longer than five years] was a challenge. Now the absolute size of financing that can be absorbed in the bank market is also a challenge,” said Sumit Dayal, global head of leveraged finance at Standard Chartered.
And the obvious solution to achieving size on a financing is putting in place a big underwriting group. But that is not without its issues as Dayal pointed out.
Getting the right balance
“Having too many underwriters for a multi-billion funding is not necessarily ideal in terms of confidentiality and speedy execution of the transaction. Finding the liquidity and the right banks to partner with is the issue acquirers and their financiers face,” said Dayal.
Indeed, in a region where borrowers are brought up on a diet of tightly priced loans, achieving that balance is critical to the success of any financing. While the typical price-sensitive Asian borrower has been reluctant to pay up, there is an increasing realisation that the liquidity squeeze is not going away anytime soon, which means it is no longer a borrower’s market.
One by-product is that loans are being conservatively and sensibly structured to sell.
Leveraged buyouts in Asia are certainly seeing conservative structures even though transactions are few and far between. Leveraged finance in Asia is primarily driven by activity in Australia and Japan and although there have been some setbacks in terms of some potential buyout opportunities not translating into dealflow for lenders, practitioners are hopeful 2012 will yield a decent crop.
Financial sponsors are keen to exit their investments, which could lead to IPOs, trade sales or leveraged recapitalisations. To that end, Australia has already recorded A$969m from three deals, namely for Outdoor Media Operations, SCA Hygiene Australia and Valad Property Group.
Moreover, a dozen lenders have clubbed an A$700m-plus LBO financing for Australian private-equity firm Pacific Equity Partners’ buyout of services company Spotless Group. The loan pays margins of 450bp–475bp over BBSY and has leverage of 3.5x Ebitda showing that despite so many banks participating at the top, the structure is conservative.
Bankers expect the market for M&A and leveraged financing to evolve as funding conditions vary globally and lenders become more selective in their quest to maximise returns on capital while eschewing riskier lending.