A potential refinancing for Blackstone-backed ShyaHsin Packaging is headed back to the drawing board as the sponsor continues to negotiate with prospective lenders on the loan terms and structure amid a weakening Chinese economy.
The refinancing talks come at a time of sluggish consumer spending, with a recent downgrade of the holding company of ShyaHsin peer HCP Global also dampening sentiment towards the cosmetic packaging sector. Blackstone is discussing adjustments to the US$537m loan’s tenor from five years to a “3+2” structure, giving it a three-year tenor with the option to extend by two years, to increase flexibility and lower fees, according to sources familiar with the situation.
“We do not have a very optimistic outlook on the packaging industry as the sector does not require unique technologies and the packaging market is highly competitive, with numerous players both at home and abroad,” said a loan banker at a Taiwanese bank. “The intense competition has put downward pressure on the prices as well as the profits for packaging companies, while raw material prices continue to rise amid global economic volatility.”
However, some bankers familiar with Shanghai-headquartered HCP and ShyaHsin believe the latter holds a stronger market position as it has more diversified business operations.
“HCP is a one-off situation. ShyaHsin is different as its exposure to the sector is far more diverse and it is also less concentrated in China,” said a banker familiar with both credits. “While it is not immune to sector-related risks and the weaker economic environment, I think ShyaHsin will weather them out much better than others.”
ShyaHsin, which is based in the city of Kunshan in Jiangsu province, has manufacturing facilities in China and Mexico, and clients in China, Japan, South Korea and Europe.
“The company has shown stable growth in revenues and Ebitda, even during Covid-19,” said a loan banker. “This can be attributed to the experienced sponsor and the packaging company’s diversified business operations across Asia, Europe, and the Americas, which allowed for a faster recovery from the pandemic’s impact.”
ShyaHsin's loan is expected to carry a leverage below 5x. Proceeds will refinance a US$610m seven-year borrowing from November 2017 that funded the LBO then, which valued the cosmetics packaging firm at about US$800m–$900m.
Turnaround in sentiment
Meanwhile, some existing lenders to HCP are having a change of heart after supporting private equity firm Carlyle Group’s leveraged buyout of the company last year. A dozen lenders joined the US$605m Term loan B that closed in August 2022, overcoming challenging conditions in the global leveraged finance market to become the first such borrowing to be distributed only in Asia (excluding Australia).
Just over a year later, some of the lenders are concerned over the company’s cashflows, pointing to HCP’s heavy reliance on China as a major contributing factor. Additionally, packaging companies focused on the niche beauty industry are experiencing profit margin pressures resulting from partnerships with industry giants like L'Oreal and Estee Lauder.
In July, Fitch downgraded Deer Investment, the holding company of HCP, to B− from B, citing expectations of elevated Ebitda leverage over the next two years.
Fitch forecasts Deer Investment’s Ebitda leverage to reach 7.8x this year, against previous expectations of 5.5x. Weak consumer sentiment, although recovering from the trough during the Covid-19 pandemic, has weighed down Deer's recovery and deleveraging. High interest payments and rising rates have also affected cashflows.
The rating agency expects Deer to cut capex to limit cash burn as it struggles to generate positive free cashflow amid weak Ebitda and high interest expenses.
Successful outcomes
Some other Asian packaging companies are faring better than HCP. India’s Parksons Packaging successfully closed syndication of a US$130m loan for refinancing and a dividend recapitalisation last month, after attracting seven lenders. The deal received a strong response and banks had their commitments scaled back.
Similarly, Australia's Orora exercised a rare reverse flex last month, revising down the pricing on its A$1.7bn loan after receiving a positive response from the market.
(Additional reporting by Evelynn Lin)