Focus Media Holding’s US$1.725bn LBO financing overcame several hurdles to play a crucial role in ensuring the completion of the Nasdaq-listed company’s US$3.7bn buyout – the largest involving a Chinese target – and successfully passed a vital test for the country’s leveraged finance market.
Two of the biggest challenges the buyout faced were allegations from Muddy Waters in November 2011 that Focus overstated assets and paid too much for acquisitions, as well as a US SEC investigation into the Chinese display advertising firm’s possible securities violations.
Adding to the deal’s complexity was the fact that, besides seeking the largest buyout financing for a Chinese company, the loan market debutant lacked name recognition among foreign lenders and had no hard assets in its underlying business.
As such, prospective lenders had to approach not only their risk committees to get credit approvals, but also their respective boards to take into account reputational risk.
“The deal was severely complex and had significant challenges in that it featured a debut borrower with an asset-light business, an offshore holdco structure for a Chinese credit, regulatory challenges – and still achieved a great outcome in syndication,” said Benjamin Ng, head of debt syndicate, loans and acquisition finance at Citigroup.
Another concern was the presence of multiple sponsors in the buyout consortium, as evident in the withdrawal of CDH Investments from the sponsor group. This forced lenders to rework documentation and apply again for credit approvals.
Despite the challenges, the original three-member arranger group, comprising Citigroup, Credit Suisse and DBS Bank, expanded to nine after a strong response from lenders at the underwriting stage.
The strong response also led to a change in the financing structure, as a US$200m standby letter of credit facility from DBS replaced a US$200m–$300m bridge-to-bond. The SBLC and a US$450m 12-month bridge-to-cash were not syndicated, leaving only a US$1.075bn five-year term loan to sell down.
Excluding the US$450m bridge-to-cash, the net opening leverage amounted to 1.95x, which, combined with the fact that the entire LBO debt represented less than half of the total US$3.7bn funding required for the buyout, made the debt structure conservative.
The loan launched into senior syndication in January 2013 and the momentum that had built up at the underwriting stage continued, with nine more lenders joining before the end of March.
Pricing was structured to make the financing as attractive as possible to lenders, with the top-level all-in at 611.45bp, based on an initial margin of 525bp over Libor and an average life of 3.47 years.
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