Hyundai Petrochemical LBO hits market

Are investors are licking their lips in anticipation of the largest LBO facility so far this year?

Arrangers JP Morgan, Hana Bank and Kookmin Bank launched a Won 800 billion (US$666 million) LBO financing for the purchase of Hyundai Petrochemicals by Honam Petrochemical and LG Chem last Friday. At time when Korean banking assets continue to offer nominal margins, Hyundai Petrochemical offers a significant pick-up

The total consideration is KSW1.74 trillion (US$1.45 billion), with additional funds to come from a Won 600 billion (US$500 million) equity injection from the sponsors and a Won 340 billion (US$283 million) deferred notes issue to be held by the creditors.

This loan is split between a Won 400 billion (US$333 million) 366 day tranche and a Won 400 billion (US$333 million) four-year, nine month amortising portion. Lenders have the option to book their commitments in either Korean Won on a fixed or floating rate basis, or US dollars on a floating basis.

Banks joining the 366 day segment will earn a margin of 165bp over the one year A+ corporate bond rate for fixed rate Won commitments or 175bp over the 91 day CD rate on a floating rate basis. US dollar lenders receive 150bp over three month Libor.

Lead arrangers joining at the top tier booking their commitments in Korean Won earn an underwriting fee of 15bp and a front end fee of 20bp for Won 60 billion (US$50 million) tickets. Investors providing US dollars receive a 15bp underwriting fee and a 25bp participation fee as lead arrangers taking Won 60 billion (US$50 million) equivalent.

In the amortising portion Won providers gain 200bp over the three-year A+ corporate bond rate on a fixed basis, or 170bp over the three year A+ corporate on a floating rate basis. US dollar participants are paid 225bp over Libor. Participants signing up to this tranche with pledges of Won 60 billion (US$50 million) as lead arrangers gain an underwriting fee of 50bp and a front end fee of 50bp for Korean Won contributions and 50bp and 60bp for US dollar tickets.

JP Morgan has been a pioneer of this form of structured financing in the Asian region, arranging several facilities in the past three years. It ran the books on the first ever Korean LBO in 2000, a Won 340 billion (US$283 million) deal for Mercury Information & Communication and followed up with the Won 345 billion (US$287 million) offering for Haitai Confectionery in 2001.

Bankers were hoping that these deals would initiate a deluge of such financing opportunities. This has not materialised as of yet, but many observers remain confident the bulging pipeline in countries such as Korea will bear fruit in the near future.

Dealogic figures show that the LBO dealflow has been little more than a trickle with just eight deals being completed since 2000. Market observers point out that volume in 2002 exceeded $1 billion for the first time and that this is a good sign for the future.

The bulk of this figure was provided by the highly successful $1.05 billion Eukor Car Carriers deal completed by arrangers Citigroup, KDB and KEB in December. This facility was divided between a $650 million tranche available to domestic banks that paid an all-in of 365bp for an average life of five years and a $300m offshore portion priced at 217.5bp for two year money.

These levels are substantially higher than the wafer thin pricing offered on Korean banking assets. Korean corporates have recently struggled to raise funds in the double digit range but even this pales in comparison to the margins paid on the LBO facilities.

Investors flocked to the deal and the arrangers were able to secure commitments from over 23 institutions as bankers took advantage of the significantly higher fee income on offer compared to other credits in the market. Syndicators around the region have suggested that appetite for this credit it likely to be just as strong as bankers look to improve their margins in what has been a difficult year so far.

Some loan bankers have expressed doubts over the quality of the credit as it is heavily in debt and sponsors are in fact buying the company from its creditors. The arrangers have shrugged off such concerns, pointing out that the financial performance of the company has improved every quarter since 2001 and it recorded an Ebitda of KSW416 billion (US$333 million) for the year ended March 31.

In addition the deal is highly structured with a comprehensive covenant package attached to the transaction as well as pledges of all tangible and intangible assets. Officials are confident that these will allay any fears bankers have and ensure a successful outcome to the syndication. Responses are due June 3.

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