Chinese packaging company HCP, held by private equity firm Texas Pacific Group (TPG), has pulled its $380 million covenant-lite loan that targeted US institutional investors, signalling a pushback on pricing of high-yield loans sold by Asian companies.
According to a source familiar with the deal, the combination of rising geopolitical risk and a flight to safety meant that investors were demanding higher yields, which HCP was unwilling to pay.
Investor sentiment took a beating during the first week of August as Russia amassed troops on Ukraine’s border and European woes came to the fore, with Italy slipping back into a recession and Portugal bailing out one of its banks.
According to EPFR Global, which tracks fund flows, redemptions from high-yield and floating-rate funds hit record levels in early August. Investors pulled out more than $8 billion from US high-yield funds, while floating-rate bond funds experienced record-setting outflows after US Federal Reserve chairman Janet Yellen said in July that the bank was keeping an eye on leveraged loans, the EPFR report added.
Many large portfolio managers in the US were also away in August and those that were around were putting prospective deals under a magnifying glass. “US investors have become much more selective and are demanding their pound of flesh in terms of pricing,” the source familiar with the deal added.
US investors’ pushback on pricing could make it more difficult for some Asian borrowers to access the market, cutting off a source of funding that offers longer tenors and looser covenants than are available in Asia’s bank-dominated loan market.
HCP’s $380 million financing was conducted through a Cayman entity, HCP Global, and included a $230 million seven-year first lien, a $50 million five-year first lien revolving credit facility and a $100 million eight-year second lien. Moody’s had a provisional B2 rating on the seven-year piece and revolving credit facility and a B3 rating on the eight-year piece, while the first lien is rated B and the second lien is rated CCC+ by Standard & Poor's.
HCP had launched loan syndication on July 29, with price talk of 375bp over Libor for the seven-year first lien and 725bp to 750bp over Libor for the eight-year second lien. There was a 1% Libor floor, which meant that, on the interest payment date, investors would have received a margin over the higher of 1% or the prevailing Libor rate. Both pieces were to be offered at 99.
HCP was acquired by private equity firm TPG in 2012 and the proceeds of the loan were to be used to repay an existing term loan and to upstream dividends to TPG.
According to the source familiar with the deal, there has been more investor interest for primary leveraged buyout (LBO) financing compared to loans taken to refinance buyouts or to repay sponsors via dividends, as borrowers need the funds to close the LBOs and hence are willing to pay up.
Singapore packaging company Goodpack last week closed a $720 million buyout financing targeting US institutional investors, with no financial covenants. The company is in the midst of being taken private by US private equity firm KKR for $1.4 billion.
However, the pricing terms for Goodpack’s deal were roughly similar to HCP and Goodpack’s leverage level was said to be higher with a debt-to-Ebitda ratio of about 6.5 times at close.
Goodpack’s $550 million seven-year first lien offered a margin of Libor plus 375bp and was offered at 99.25 to yield 4.94% while the $170 million eight-year second lien offered a margin of Libor plus 700bp and was offered at 99.25 to yield 8.19%. Goodpack’s first and second lien were rated B2 and B3 respectively.
A second industry source away from the deal said that it is usually harder to sell loans where the proceeds are used for dividend repayments towards sponsors. Also, the bulk of HCP’s assets are in China. Although HCP’s loan benefited from asset pledges and guarantees from all substantial subsidiaries, HCP’s Chinese subsidiaries were excluded, a Moody’s report in July said.
In contrast, Goodpack is headquartered in Singapore, a jurisdiction that more investors are comfortable with. It has offices in 19 countries including the US, Korea and Japan, according to the company website.
Shanghai-headquartered HCP designs and makes packaging for cosmetic and skincare products. Its customers include Estee Lauder, L’Oreal and P&G, and it has five production facilities including three in China, one in the US and one in Mexico.
According to the source familiar with the deal, HCP is expected to return to the market later when conditions are better and could tap either the US institutional investor base or the Asian bank market.
Bank of America Merrill Lynch, BNP Paribas and Citi were mandated lead arrangers for HCP’s loan. Citi was the lead left.