Will Hong Kong bankers flock like birds?

The first new LBO transaction in Hong Kong was launched this week - but will the returns prove attractive enough?

Plain vanilla blue chip loans have been the staple diet of Hong Kong bankers ever since the Asian financial crisis, with few willing to move down the credit curve and raise loans for the lesser lights. This school of thought has shifted significantly over the past two years, with 2003 seeing a glut of mid-cap and structured transactions hitting the market.

According to Dealogic figures, Standard Chartered and DBS Bank lead the way, raising HK$2.69 billion ($342 million) and HK$1.57 billion ($201 million) respectively. BNP trails in fourth place with HK$1.4 billion from six deals - and has bagged the mandate for the first HK dollar LBO to emerge this year, the HK$200 million ($25.7 million) five-year facility for Birdland (Hong Kong).

General syndication was launched on Wednesday and offers banks a margin of 225bp that is linked to a debt to EBITDA grid. The deal is being marketed on four levels with arrangers taking tickets of HK$40 million ($5.1 million) earning 110bp at the top tier.

The borrower is the current holder of the KFC franchise in Hong Kong and its ownership is currently split between the chairman who holds a 20% stake and various investment firms and minority interests who own the remaining 80%. This deal will finance the purchase of the 80% stake by Huntingdon Holdings, with the chairman retaining his 20% portion.

Market observers have suggested that the pricing on the deal was slightly less than was initially proposed when the transaction initially came to light. A number of banks submitted aggressive pitches and this forced the pricing down from around the 275bp mark to under 250bp.

Bankers point out that the return on this deal will be far in excess of the HK$3 billion ($385 million) fundraising for Hongkong Electric that was launched on Thursday. That facility pays a meagre all-in of just 28bp to lead managers committing HK$100 million ($12.8 million) - one of the most tightly priced deals of the year.

One senior loan officer claimed that the transactions were not comparable because one is being syndicated amongst relationship banks with the seven strong arranger group likely to hold onto large tickets. The other entails a high degree of risk and is likely to consume a large portion of bankers time as they assess the relative merits of the transactions.

There are no comparable financings from this year for bankers to relate to and some have looked to the HK$280 million ($35.9 million) LBO last year for Asia Printers that paid 264bp for five year money. This deal was refinanced at a significantly lower price with banks earning a margin of 180bp and a front end fee of 75bp for five years.

Officials close to the financing point out that most HK dollar deals completed this year have been priced very tightly and that banks are keen to book high yielding assets. They say that the increased number of second tier borrowers in the markets has proved that the appetite for these credit exists and that this fundraising will generate a lot of interest amongst investors.

Responses are due December 10.