Asian LBOs: Leveraging the leverage

In contrast to subprime-affected markets, Asian deals backed by financial sponsors will find the leverage they need, albeit at tighter prices and terms.
It was standing room only at the Asian Private Equity and Venture Forum in Hong Kong yesterday, particularly during a panel discussion about the availability of leverage for financial sponsor-led deals. People gathered to hear a group of experts debate the topic: ôLeveraging the leverage: taking out the banks - at a priceö.

Panel member Joseph Ferrigno III, who is managing partner at Asia Mezzanine Capital Group, talked about the amount of leveraged debt waiting to be syndicated around the globe. ôDebt currently not syndicated for LBOs is in the region of $400 billion,ö said Ferringo. ôThis is due not only to the subprime situation but to a lot of disease causing fever to run high.ö

AsiaÆs debt markets havenÆt been entirely immune to the spillover from the subprime situation. The impact has been felt both on pricing, which has tightened, and on demand, as appetite has weakened. In this environment, questions have been raised about whether private equity deals in Asia will continue to find the leverage they need.

Darryl Flint, chief investment officer of PMA Capital Management, said that the fallout has affected different instruments in different ways. PMA seeks private deals in the range of $20-150 million and targets borrowers ôwho have a small window of providers they can approach to meet their funding needsö.

ôIn our niche segment there is still plenty of liquidity for the right type of borrower,ö explained Flint. ôCertain investment banks are selling some proprietary positions but not at distressed prices; this is supply we may not have seen earlier. It may be driven by headquarters telling them to sell.ö

Participants also highlighted that the magnitude of the contagion in Asia is relative to the regionÆs size. The leveraged loan market in the US was estimated at $1.3 trillion in the third quarter of 2007 compared to $80 billion in Asia. Previous debt deals in Asia were also done at conservative Ebitda multiples compared to the aggressive multiples applied in the US. Finally, companies in Asia are benefiting from strong economic growth driving sales and profits.

ôThe need for financial sponsors to get incremental leverage on deals will drive deal flow,ö said Chris Gammons from Citi, adding that the Term Loan B market has suffered the most in recent months. Some large deals in this sector have been pulled. But he was sanguine even about these deals, saying that companies which have the ability to stagger their capital requirements have prudently taken a step back and will be able to successfully access loan markets at a later stage.

ôWe are seeing more deal flow and issuers are approaching us directly rather than via investment banks,ö says Liang Meng, CEO, Greater China, private equity at global investment management firm, DE Shaw, suggesting it may not be all bad news for players post-subprime. Indeed, this was also a recurring theme in the panel discussion. The inability of some subprime-affected banks to continue to do deals is expected to be picked up by other market participants. ThatÆs why, in general, panel members werenÆt concerned about the supply of funding.

ôI worked on a deal in the US before the subprime situation where a borrower managed to raise $650 million of debt without financially audited statements,ö observed Dennis Barsky, partner at Jones Day, alluding to why things went pear-shaped. The audience was visibly amused by this. He went on to highlight that borrowers had become accustomed to demanding very few material adverse change (MAC) clauses, a situation which has also changed.

Participants also agreed that the bargaining power has now returned to the buy-side, a situation they generally seemed relieved about and did not expect to change in the near future. In the future, deals in Asia will get done at tighter terms, but as CitiÆs Gammons clarified: ônot at a price which makes them unattractiveö.

ôIn contrast to the Asian financial crisis of 1997, the (problem with) leverage is not at the borrower level but at the lender level,ö summed up PMAÆs Flint. ôEvents occurring in the US and Europe are good for Asia because Asia can learn valuable lessons.ö

But Meng from DE Shaw had the last word when he expressed a thought which most of the audience no doubt shared: ôItÆs a lesson IÆd rather not have had to learn.ö
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