* Loans: Dry powder, cheap debt drive Japanese LBO loans to decade high
By Wakako Sato
TOKYO, May 17 (LPC) - International lenders are finding little joy in Japanese leveraged buyouts even as global private equity firms ramp up debt-funded acquisitions in the world's third-biggest economy.
Japanese LBO loans are running at a decade high, with more than US$10bn of deals closed already this year. But the country's major banks are squeezing out their international rivals with cheap funding and aggressive terms, robbing global banks of potentially lucrative underwriting opportunities.
KKR-owned Japanese auto parts maker Calsonic Kansei Corp raised over ¥1trn (US$9bn) in Asia's largest LBO loan in April with DBS Bank the only non-Japanese lender to join in senior syndication, even though the deal was denominated partially in euros and offered to international banks.
The seven-year senior loan backs Calsonic’s acquisition of Magneti Marelli, the high-tech car parts unit of Italy’s Fiat Chrysler Automobiles.
South Korean private equity firm MBK Partners recently clubbed a debt financing of up to ¥100bn with Japanese banks supporting its bid for the LBO of Godiva Chocolatier’s businesses in Japan, South Korea, Australia and the future rights to develop New Zealand.
Aggressive terms on both financings are factors behind the dominance of Japanese lenders. Calsonic’s loan pays interest margins of less than 200bp over Libor and has covenant-lite features, while the Godiva loan carries a debt-to-Ebitda multiple of up to 10 times.
“The Japanese LBO market is dominated by the top-tier domestic banks including the three megabanks [MUFG, Mizuho Bank and Sumitomo Mitsui Banking Corp] and it rarely leads to general syndication,” said a Tokyo-based LBO banker.
In another recent example, the ¥47.7bn loan backing the management buyout of Okinawa-based Orion Breweries closed as a domestic club in March despite some foreign lenders showing interest.
Japanese banks flush with liquidity are also participating in subordinated and mezzanine loans, which are typically the preserve of non-bank investors in most other parts of the world.
Institutional investors are almost non-existent in the Japanese LBO market, while Japanese banks have been active investors in collateralised loan obligation (CLO) funds that are dominant in the leveraged finance markets in the US and Europe.
“Japanese banks are eating into the mezzanine market, which is only seen in Japan and is an aberration,” a Tokyo-based mezz investor said.
Mizuho and Development Bank of Japan, along with other funds, provided a ¥80bn mezz facility that also backed Calsonic’s buyout of Magneti Marelli.
Including Calsonic’s financing, Japanese LBO loans have already reached US$10.31bn so far this year via seven deals, surpassing the US$7.61bn via four deals in the whole of 2018 and on track to eclipse 2008's record of US$12.16bn from 24 deals, according to LPC data.
It comes against a backdrop of declining volumes in overall syndicated lending in Japan, which dropped 23.2% year-on-year to US$66.6bn in the first quarter of 2019.
International banks, which played major roles in some jumbo deals at the height of the LBO boom in Japan, have withdrawn from the market in the wake of the global financial crisis.
Market participants expect disposals from Japanese conglomerates to drive LBO activity this year as global PE firms position themselves for these opportunities. In one example, Hitachi plans to sell its majority stake in Hitachi Chemical in a deal that could fetch over ¥300bn.
Japanese megabanks are expected to lead the related financing opportunities given their strong relationships with the targets and the cheap funding they provide to sponsors.
That has been evident in previous carve-outs. In 2018, Toshiba Corp completed a ¥2trn sale of Toshiba Memory, the world's second-biggest producer of NAND chips, to a group led by US private equity firm Bain Capital. Mizuho and SMBC led a banking group that committed ¥600bn in what was Japan's largest LBO loan at the time.
KKR, which has been ramping up acquisitions in Japan over the past couple of years, completed two LBO loans in March 2017. Both were club deals with Japanese banks – a seven-year financing of around US$1.035bn for its ¥147.1bn LBO of Hitachi's power tools unit Hitachi Koki and a ¥430bn seven-year senior financing for its ¥498.3bn buyout of Calsonic Kansei Corp.
In October the same year, a KKR-led consortium raised a ¥98.74bn financing package from five Japanese banks for its ¥143.93bn LBO of Hitachi Kokusai Electric.
Reporting By Wakako Sato; editing by Prakash Chakravarti and Steve Garton