In its first deal in China, KKR will buy a minority stake in Tianrui Cement through the investment vehicle Titan Cement for a total of $115 million. KKR has not released details of the stake, but sources close to the deal say that it is in ôthe upper end of minority holdings, namely a significant stakeö. The media has speculated that the stake is around 43%. KKR will also get board representation proportionate to its holding.
Simultaneously, International Finance Corporation will acquire a 4% stake in Tianrui. The valuation at which IFC has bought shares has not been disclosed.
As part of its investment, KKR has assisted Tianrui to close a debt facility. A syndicate has provided debt financing commitments worth Rmb2.458 billion ($335 million). The debt is an amortising five-year term loan. The syndication closed last week but full details of the facility were released yesterday.
Meanwhile, IFC has provided $60 million of dollar-denominated financing.
Ten banks participated in the renminbi part of the deal. China Construction Bank took the largest share of Rmb400 million, with ING a close second at Rmb348 million. Citic Bank and Societe Generale took Rmb300 million each and JPMorgan kept Rmb200 million on its books. The balance was shared between Korea Exchange Bank (Rmb120 million), Bank of Nova Scotia (Rmb100 million), Shinhan Financial (Rmb100 million), Hang Seng Bank (Rmb75 million) and China Mercantile Bank (Rmb50 million).
Sources close to the deal say the facility was over-subscribed.
ôWe are pleased that we could successfully and expeditiously close this landmark and complex transaction, despite volatile market conditions,ö says Anand Narayan, head of financial sponsors for Asia at JPMorgan in an exclusive interview with FinanceAsia. ôThis confirms our own view that Asia is still open for business for financial sponsors, despite subprime related turmoil which may be affecting other markets.ö
Europe is largely a syndicated loan market and the willingness of a number of European banks to participate in the Tianrui facility corroborates their familiarity with the product.
The coupon for the loan was at the low end of the range permitted by the PeopleÆs Bank of China. The facility carries standard covenants including those related to debt service coverage, interest coverage and leverage.
One source close to the deal says: ôGiven the complexities involved, the deal was closed in a tight timeframe of around 90 days.ö
Some of the funds raised were used to take-out existing bilateral loans on TianruiÆs balance sheet, which had to be refinanced as part of the KKR investment.
The first sponsor-related, renminbi-denominated long-term syndicated loan facility arranged by international banks in China has a number of pioneering features. All documentation for the loan was negotiated and signed in Mandarin. Shared security metrics including pari passu charge between the international and local lenders in a sponsor situation were finalised for the first time.
Signalling its confidence in Tianrui, KKR and the ability of the local financing market in China to step up to the plate, JPMorgan was sole underwriter for the facility and went on to arrange and structure it.
ôSome markets in the region, such as Taiwan and Korea, are used to locally financing sponsor-related deals however this transaction is path-breaking for China,ö comments JPMorganÆs Narayan. ôWe are optimistic that this deal will be the forerunner for further such deals.ö
Tianrui Cement was founded in 1993 and is currently the largest cement producer in Henan province and one of 12 cement producers named in a report published by China, which banks are directed to support.
KKR, which is known for doing large buyouts in developed markets, seems to be bringing the flexibility necessary to win and close deals to its approach in emerging Asia. Tianrui, KKRÆs first China investment, is a minority stake. But it obviously meets or, if growth in China stays strong, may even exceed the private equity firmÆs return criteria.
It is likely that KKR will have negotiated veto rights over key decisions such as acquisitions and management changes, which are commonplace in non-majority control investments.
The deal comes at a time when market participants are closely watching developments with respect to financing on private equity deals in the US and Europe. As liquidity dries up in some subprime affected markets, leverage for private equity deals is becoming a challenge.
Specialists have been expressing the view that Asia will not be affected by the malaise as local banks are flush with funds and sponsors are keen to put money to work in a region which looks like set to continue to provide attractive opportunities and deliver healthy returns. The Tianrui financing package seems to indicate that the optimists could be right.
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