January 25, 2019 / 9:21 AM / 3 months ago

Asian leveraged finance perks up

Hong Kong, Jan 25 (LPC) - Leveraged finance is off to a promising start in Asia Pacific in 2019, with a handful of big-ticket private equity buyouts set to hit the loan market despite high levels of economic uncertainty.

The strong deal flow in Asia stands in contrast to the US and European markets, where concerns over growth prospects and lending standards are hobbling activity.

In Australia, three leveraged buyouts are in the works for healthcare company Healthscope, adult education provider Navitas and accounting software maker MYOB. The three LBOs could add up to debt financings of A$3bn–$4bn (US$2.13bn–$2.85bn) combined.

Other promising deals elsewhere in the region include KKR-owned Japanese auto parts maker Calsonic Kansei's acquisition of the high-tech car parts unit of Fiat Chrysler Automobiles and Baring Private Equity Asia’s bid for Indian information technology company NIIT.

“This year the level of leveraged finance activity seems busier than 2018. A lot of PE clients raised new funds in the past few years, but last year was flattish as far as new buyouts were concerned,” said James Horsburgh, head of leveraged and acquisition finance for Asia Pacific at HSBC.

While PE-backed M&A reached a record US$101bn in Asia (including Japan) in 2018, very few of those led to leveraged financings.

The biggest disappointment was a ¥825bn (US$7.5bn) loan backing Bain Capital’s LBO of Toshiba's chip unit in Japan. Even though that loan was the biggest LBO financing from Asia, it was not syndicated widely and was sold to only four banks.

Another missed opportunity was the rejection, last August, of a US$17.6bn bid for fast-food group Yum China Holdings. Lenders were looking to support Chinese investment firm Hillhouse Capital Group and its consortium partners with up to US$8bn of debt, including a senior loan of around US$6.5bn–$7bn and a mezzanine financing of US$1bn–$1.5bn.

The debt would have set a record in Asian leveraged finance with leverage of around 6x, and a senior portion accounting for 4.8x–5.2x.

DRY POWDER

Market participants, however, point to several factors providing ideal conditions for Asian leveraged finance dealmaking in 2019.

Lower equity valuations, due to the economic slowdown in China, its trade dispute with the US, or Britain’s impending exit from the European Union, present opportunities for M&A and LBOs and put public-to-private buyouts back on the table.

PE firms are also sitting on a record US$336bn of 'dry powder' – money committed but not yet invested – as of mid-December, according to data provider Preqin, having raised US$445bn in new funds for Asia since 2015.

“There have been several PE acquisition deals involving minority stakes and very little use of leverage,” said the head of leveraged finance for Asia at a US bank. “Capital has never been a constraint in Asia. It is more a question of willing sellers than willing buyers.”

REGIONAL DYNAMICS

Banks in Asia remain liquid and are eager to support leveraged buyouts, and the growth of institutional participation in Asian leveraged loans is adding another pool for financial sponsors to tap into.

Although this could lead to looser lending standards, bankers are not overly concerned about Asia mirroring aggressively structured leveraged loans in Europe and the US.

“Asia has seen only a handful of high-quantum, aggressively structured leveraged financings in recent times, although as an Asia-wide phenomenon there has certainly been a watering down of terms such as covenants relating to debt-service coverage ratios,” said Lyndon Hsu, global head of leveraged and structured solutions at Standard Chartered.

"The DSCR covenant has now become almost redundant in Asian leveraged finance deals largely because of the near-bullet maturities with average lives stretching to longer than 4.5 years."

HSBC's Horsburgh also resisted comparisons with other regions.

“The Asian leveraged finance market is totally different from the US and Europe and is in good shape on the back of strong bank and non-bank institutional liquidity and credit appetite," he said.

"Sponsors have enjoyed more flexibility on financing structures with many securing longer average lives and slightly better covenant terms.”

Collateralised loan obligation funds, which are the biggest buyers of leveraged loans in the US, are almost absent in Asia. In 2018, CLO issuance in the US reached a record US$128bn.

Abundant pools of institutional investor liquidity in the US and Europe has led to many financings with covenant-lite structures, whereas in Asia's bank-dominated buyside, such financings find few takers.

Sponsors seeking cov-lite structures have typically tapped the term loan B market in the US, but that product is only available to a select few borrowers from the more mature Australian and Japanese markets.

Unitranche financings – a blended structure that offers sponsors greater leverage and is often cheaper than traditional LBO financings – have also yet to take off in Asia.

In the US, unitranche facilities raised US$27bn in 2018, 13% higher than 2017 levels, according to LPC data. Asia has seen only five unitranche loans totalling A$1.69bn since the product made its debut in the region nearly 18 months ago.

Reporting By Prakash Chakravarti; Additional reporting by Wakako Sato; Editing by Chris Mangham and Vincent Baby

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