Ask any banker why Chinese LBOs (leveraged buyouts) are receiving so much attention and the answer is always similar: "The two topics in Asia that attract the most attention are China and buyouts. When you combine the two interest grows dramatically, even if the actual deals are only just beginning to materialize," says Eric Mason, JPMorgan's Asia-Pacific head of leveraged finance.
Private equity investors poured over $4 billion into China in the first quarter of 2006, according to Dealogic, but their investments have generally avoided leveraged financing. A classic LBO involves a financial sponsor using a vehicle to borrow substantial amounts of debt, on a non-recourse basis, to finance the acquisition of a company. The debt is secured over the assets being bought and repaid from cash flows generated by the target's business. By using leverage, a buyer can gain control of an expensive company with minimal cash outlay.
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