Joint bookrunners Citigroup and Merrill Lynch have structured a seven year multi-tranche facility that, according to bankers involved, is distinctly æAsianÆ in that the facility totally comprises senior debt, unlike the involvement of institutional investors inherent in typical European and US-style LBOs. The facility is split into a $315 million term loan, a $35 million Indian rupee equivalent revolving credit and a $10 million revolver. The deal also features amortisation with an average life of 5.8 years.
Outsourcing firm, Flextronics Software Systems specialises in telecommunications proprietary software and is involved in the design, development and testing phases. Clients include Motorola, Nokia, Samsung and Vodafone.
The acquisition is valued at approximately $900 million and Flextronics International will retain a 15% equity stake. Located globally, the business is predominantly Indian and syndication will be primarily focused in Asia.
The deal features a relatively high debt-to-EBITDA ratio of 5.8 times and a debt-to-equity ratio of 40:60, a high figure compared to most LBOs. Despite the high leverage involved, bankers close to the deal point out that the borrower is in a high growth sector and is a mature business in a specialised field, enabling the actual leverage to come down at a rapid rate.
The Flextronics deal is offering banks a spread of 275bp over Libor, a result of the transaction being highly leveraged, and tagged to a debt-to-EBITDA grid. And banks will be hard-pressed to find other comparables with such attractive pricing. Fees also range from 100bp to 125bp flat.
Another feature of FlextronicsÆ transaction is that the structure allows for the repatriation of funds, previously an obstacle for LBO financings out of India.
This is KKRÆs second investment in Asia and its first in India, having been involved in the $2.8 billion acquisition of Avago Technologies together with Silverlake Partners last year. Avago TechnologiesÆ $975 million LBO facility can be seen as a comparable to Flextronics although it featured a B-loan and saw participation from institutional investors. That deal offered a margin of 250bp over Libor.
IndiaÆs first LBO, the $215 million transaction for GE Capital International Services (Gecis) completed last year, and carried a spread of 125bp over Libor. There is some dispute, however, whether the GecisÆ deal is considered a true LBO facility and is viewed by some as more of a æhybridÆ given that the deal possessed low leverage and a triple-A rated offtaker.
Private equity in Asia has been widely tipped to boom and this has been reflected in the number of investment banks - such as Merrill Lynch, Morgan Stanley and UBS -which were traditionally absent from the syndicated lending market, setting up desks in the region of late. However with a large number of banks now seeking out high yield transactions and a lack of supply currently, it remains to be seen whether sufficient volumes of such highly anticipated credit will emerge.
According to Dealogic, Asia Pacific sponsor-related entry financing stands at $596 million from three deals for the year-to-date while the $4.9 billion raised for the full year of 2005 stands as the regionÆs highest level ever. This compares to 2005 volumes of $87.8 billion in the Americas and $45.6 billion out of Europe, Middle East and Africa.
So far this year, the largest LBO facility is Newbridge CapitalÆs $467 million financing for its investment in Taishin Financial Holdings, arranged by International Commercial Bank of China. DealogicÆs league tables for Asia Pacific sponsor-related entry financing in 2005 show that Citigroup sits in third place with $619 million from two deals while Merrill Lynch was not involved in any.
With one-on-one bank meetings for FlextronicÆs LBO set to kick off in the week commencing May 22, the leads expect a number of factors to distinguish it from traditional LBO facilities and to draw in the investors. Highlights of the deal include it being the largest LBO out of India, KKRÆs involvement, the high growth sector and the attractive spread on offer. Citigroup and Merrill Lynch are in the process of building the mandated lead arranger group and market players are bound to keep a close eye on this deal to see whether it proves to be the benchmark theyÆre hoping for.