Asia’s leveraged buyout market remains a drop in the ocean compared with the US but there are signs that it is developing as lenders become more comfortable with Chinese borrowers tapping the market through offshore holding companies.
Such structures make it challenging for lenders to seize onshore assets in the event of a default. However recent deals such as Focus Media's $1.7 billion leverage buyout, which closed last year and is China's largest-ever LBO, suggest a suggest a growing acceptance of such structures.
Focus Media had a large initial underwriting group and also completed a dividend recapitalisation six months after the close of the LBO financing. In contrast, Bain Capital's $80 million loan to back its acquisition of China Fire & Security just three years earlier was a clubbed deal among only three banks.
Increasingly, banks appear willing to lend to a more diverse group of companies, including some with asset-light businesses. "From a sector perspective, we have seen more acquisition and leveraged financing opportunities from the telco, media, technology and the retail and consumer space," Siong Ooi, head of Asia Pacific leveraged finance & loans at Bank of America Merrill Lynch, said at the Asia Pacific Loan Market Association's leveraged finance seminar on Wednesday.
"This is a bit of a departure from [the] deals done a few years ago, which were principally China [state-owned enterprises] making acquisitions in markets like Australia to secure natural resource assets," he said.
Giant Interactive and Shanda Games
Two leveraged loans for Chinese online gaming companies – Giant Interactive and Shanda Games – are set to test lenders' appetite for asset-light companies with holdco structures. The former is currently syndicating an $850 million loan and the latter has yet to launch. According to one source familiar with the deal, banks are taking some time to get approval to commit to Giant Interactive, given that it is a new name with limited assets.
Indian companies have had less success in gaining acceptance for holding company structures. Both countries have encountered macro-economic headwinds and flagging growth but lenders have simply not embraced Indian borrowers.
To some extent it is a chicken and egg situation; fewer Indian companies have tapped the leveraged loan market, so lenders are less comfortable with them.
"A lot of China deals have been successfully done and lenders have gotten comfortable with holdco structures, and have reassurance that, yes, you can get the cash out of China," said Vikram Lamba, a director in Asia Pacific syndicated & leveraged finance at Bank of America Merrill Lynch, speaking on a panel discussion at the seminar. "There haven't been as many widely syndicated LBO deals done out of India," he said.
In 2013, the total volume for acquisition-related leverage finance for Asia Pacific ex-Japan was $44.5 billion, a 50% increase on 2012. Year-to-date those volumes stand at $23.6 billion.
Ooi expects a similar level of activity this year because Asian companies are cashed up, have robust balance sheets and are well-positioned to make acquisitions. "Last year was a banner year for the acquisition and leveraged finance market in terms of volumes," Ooi said. "We are seeing a similar level of confidence of deals getting done."
There are other promising signs. While leveraged loans in the region see little participation from non-bank investors, domestic banks are becoming more active and are lending in local currencies. Carlyle's loan to fund its purchase of South Korean security business ADT Korea from Tyco, for example, was heavily placed with Korean banks.
"We have seen the universe expand with local banks stepping up to support these transactions," Ooi said. "In Asia Pacific, the LBO market is 99% a bank market; having said that, this does represent a deep pool of liquidity," he said.
Even so, lenders in Asia generally remain conservative about the level of leverage allowed and wary over loan agreements lacking strong protective covenants or with bullet structures, where the principal is only paid back at the end of the loan term.
Debt-to-equity levels globally for LBO transactions are around six times, whereas in Asia Pacific ex Japan it averages at about three times, a Bank of America presentation slide showed.
