Asia has yet to fully catch the leveraged buyout bug and what LBOs there have been have largely been funded with loans rather than bonds. But times are changing, a capital markets conference in Singapore heard on Thursday.
Because of the greater flexibility afforded, panellists at the annual conference of the Asia Securities Industry & Financial Markets Association said they expected most future LBOs in Asia to be financed via debt capital markets.
“Bonds are more flexible when it comes to the packaging of a security and much easier to do,” Enrique Becerra, managing director for the Asia-Pacific sponsors group at Bank of America Merrill Lynch, said.
Traditional bank loans come with far stricter terms than bonds because of the types of covenants put in place by lenders to protect themselves from borrowers defaulting on their obligations. And although non-amortising loans – known as ‘term loan Bs’ – are considered less costly when compared to bonds, these too come with caveats, one banker warned.
Term loan Bs, which are bond-like and come with mandatory prepaying provisions, appeal largely to US institutional investors. These types of investors tend to demand greater security for such instruments, notably from Asian borrowers they’re unfamiliar with, Haitham Ghattas, head of high-yield capital markets for Asia at Deutsche Bank, said.
Because of this some of these loans have in the past been cut back or even pulled. For example MMI International, the Singapore-based supplier of hard-disk drive components, last year reduced its term loan from $230 million to $180 million and lowered the duration of the instrument to five years from seven years.
“They probably would have been better off going to the bond market,” Ghattas said.
But evidence that some companies have started to go down this route has begun to emerge. In July British restaurant chain operator Pizza Express raised £610 million in notes to fund a LBO by Chinese private equity firm Hony Capital.
In March also Pactera, a China IT consulting and outsourcing company, sold a $275 million seven-year bond. It was Asia’s first high-yield note issued to fund a LBO transaction since 2011. The proceeds of the bond, callable in the third year, were used to finance a Blackstone Group consortium’s acquisition of Nasdaq-listed Technology International.
Asian conservatism
LBOs in Asia have previously always been financed using standard five-year amortising loan facilities known as term loan As, with a leverage of typically three to four times a company’s gross debt, panellists said.
Unlike in the US, Asia has not seen an explosion of firms using term loan Bs and other debt capital market instruments to finance LBO transactions.
This is because Asian financial institutions do not like to lend money to fund dividend recapitalisations – an often avenue taken by private investment firms to recoup some or all of the money used to purchase a stake in a business, panellists said.
Unless they really understand the credit, Asian banks in situations likes these generally prefer sponsor-driven LBOs, in other words transactions that are backed by a strong private equity firm. Similar to financial institutions, debt holders are also very much focused on the issuer’s business model and the quality of the sponsor.
This shows that not every company can tap the bond market easily.
In Pactera’s case, the company benefited from having significant operations in both the US and Asia. That two-pronged business model enabled it to target two different buyer bases and enhanced its investment potential.
“If the company only has operations in China, for example, no one would know how to enforce the bonds if they default,” Becerra said. “It’s not the stuff that captures their attention as US investors don’t understand the security structure of such companies.”
Asia’s LBO potential
A buyout mentality is also still lacking in the region, despite the opportunities.
This is because Asian companies are still focused on growing their businesses by entering new markets rather than through acquisitions, the panellists said.
“Asian founders’ focus has always been on rapid growth and being masters of their own destinies,” Nicholas Macksey, principal at Baring Private Equity Asia, said.
But such a mentality is likely to wane as the appetite and willingness of domestic banks to support large conglomerates in some jurisdictions dwindles following the full implementation of the Basel III bank capital rules.
Because of this leading private equity firms have a growing strategic commitment to the region. Take Carlyle Group LP, the world’s most acquisitive private equity firm. It is expected to raise five further funds toward the end of 2014 and two of those are focused on Asia, Bloomberg-compiled data shows.
Not only are these global players keen on expanding the operations of Western companies in Asia or looking at opportunities for companies without a presence in the region, they are keen to be in the middle of the action when Asian entities begin spinning off their businesses.
“There are big opportunities in cross-border mergers and acquisitions in Asia and we’ve latched on to that theme,” Macksey said.
