Workshop on Structured Finance
Leveraged and Acquisition Finance
ASIAN LEVERAGED LOAN MARKETS: Early days but market is taking shape
of building blocks crucial to the development of a leveraged finance in
Asia are still missing but the opportunities are there.
Dan Schwartz, the publisher of Asian Venture Capital Journal, recently tried to put together a panel to discuss leveraged finance in Asia for a mergers and acquisitions conference in Singapore in October. The very few likely people to speak on the subject in Asia, however, had other commitments and the panel discussion on leveraged finance had to be dropped. "Leveraged finance in Asia is still in its infancy. It is very early days," says Mr Schwartz.
Still, many bankers believe that the time for leveraged finance may finally have come in Asia. They point to a backdrop of corporate restructuring going on across the region as large conglomerates in places such as Korea are forced to focus their business strategies and sell off non-core businesses that they started or bought on a whim when times were good. Asset prices have fallen as sellers have become more realistic. There is a large pool of private equity looking for the right deals.
These factors have spurred a good number of M&A deals and that environment should in time allow for a take-off in the leveraged finance market. Nevertheless, plenty of doubts remain about whether the pace of M&A activity across Asia can be sustained if the signs of recovery allow local corporations easier alternatives. "Is there a commitment on the part of corporates to restructure? I don't know the answer. The recovery is a two-edged sword," says Gary Stead, head of Merrill Lynch's M&A business in Asia.
Banks that are still unwilling to lend and equity markets that are nowhere near as forthcoming as in the past should continue to keep the pressure on companies to seek alternatives. "The banks and the equity markets around the region were so effusive in offering funds that there was a limited role for private equity and no role for leveraged finance," observes Jonathan Weiss, head of investment banking for Chase Manhattan in Asia.
The nascent recovery has also brought some stability to the financial markets and with it more deal-making. One of those deals this summer was a ground-breaker for leveraged finance in Asia. In July, a consortium led by Chase Asia Equity Partners acquired a 50 per cent interest in ASAT, a Hong Kong-based assembler of integrated circuit packages for the semiconductor industry. ASAT was 100 per cent owned by Hong Kong's QPL International Holdings, which retains a 50 per cent interest in the company.
The financing of the deal was done through a US$150m high-yield bond (which was going through a roadshow in October), a US$60m syndicated bank loan and equity contributions from the partners in the consortium.
Chase's Mr Weiss says that in such deals there is the first signs that the template of leveraged transactions in the US in the 1980s and 1990s, currently being repeated in Europe, is slowly taking shape in Asia as well.
If the past in the US is any indication there is more to look forward to in Asia. The Newbridge Capital acquisition of Korea First Bank from the Korean government and the Ripplewood acquisition of Japan's LTCB are both similar to the deal-making models perfected in the US by the Resolution Trust Corporation when it was cleaning up the savings and loans crisis in the 1980s. Increasingly, banks in the region are more eager to talk to private equity firms such as Newbridge. "The banks are more interested in talking to us and providing acquisition financing," says Weijian Shan, managing director of Newbridge Capital.
There is also a growing band of executives in mid-cap companies in places such as Hong Kong who are considering taking their companies private because they believe they do not get the valuation they deserve. "You are seeing companies that are growing at 20 per cent a year trading at five times their cash flow, who may do better going private," says Henry Cornell, a Goldman Sachs managing director.
However, plenty of building blocks crucial to the development of a leveraged finance market in Asia are still missing. The most glaring is the absence of a mezzanine debt market. Banks in Asia have made loans against collateral. Important sources of subordinated debt in the west have been insurance companies, which in Asia tend to be state-owned and unimaginative.
"To have a mezzanine debt industry, you have to have long-term lenders who can lend against cash flow and covenants. That doesn't really exist," says Mr Schwartz. This may soon change. US insurance company Metropolitan Life has an executive scouting for appropriate investments. While there have been plenty of private equity deals, they have been straight equity deals that have relied on bank debt.
Another significant problem that private equity investors in Asia have had to tackle is that disclosure at most companies runs the gamut from awful to terrible. Being forced to do the rigorous M&A-style due diligence promises to be beneficial for credit standards in Asia, which have been at the root of the Asian financial crisis.
One irony of the
role of leveraged finance in Asia is that far from piling crushing debt
loads on businesses as some of the notorious high- profile deals in the
US did in the 1980s, such deals should leave companies with sounder capital
structures by adding more equity. Korean conglomerates, for instance, had
debt-to-equity ratios that might have made a US LBO boutique in the 1980s
sweat. "Even if this is called leveraged finance, it is a bit of a misnomer.
If you look at Japanese corporates and Korean corporates, what we are doing
is de-leveraging," says Mr Weiss. That is another reason why leveraged
finance promises to be a good idea whose time has come in Asia.
From the Financial
Times Leveraged Finance Survey