OPEN ACCESS: How to revive APAC leveraged finance

Author: | Published: 25 Apr 2012
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Bankers in Asia’s leveraged finance market expect transactional innovation to play an increasingly critical role in the sector this year, as banks struggle to boost deal flow in the region.

Difficult market conditions have created something of a perfect storm this year for banks and corporates in the region. The slowdown in European and US markets has discouraged corporates from M&A activity, and the EU crisis has prompted European banks in particular to cut headcount and curtail activity outside of their home markets.

HSBC’s Asia-Pacific leveraged finance head, Lyndon Hsu, told IFLR that a maturing Australian and New Zealand market, where corporates are now better managed, has also left less room for earn-out and cost-out opportunities for sponsors.

Hsu said there are consequently now very few companies in any sector with good top-line growth stories of between 2 and 5%. “For 2012 deal flow is considerably down,” he said

In the region’s more nascent markets such as China and Southeast Asia, however, the proliferation of family-managed companies creates a logistical nightmare for would-be investors.

In this environment, he expected the focus would increasingly shift to the non-traditional in a bid to boost business as deal flows drop.

The market has seen some notable deals this year. CVC’s buy-out of City Telecom this month, in a transaction involving HKD2.5bn leveraged acquisition facilities, is one of only a handful of Hong Kong buy-outs in the last seven years.

Last month saw the launch of a privatization of Hong Kong-listed Alibaba Group in a $3 billion financing, split as a $1 billion, three-year term loan, and a $2 billion one-year bridge.

Linklaters’ David Irvine, who is acting for JPMorgan and Standard Charted Bank as arrangers on the CVC deal said the transaction showed there was still appetite for well structured transactions with good credit stories in the market.

Hsu said banks in the region were keen to get involved in the Alibaba transaction too, not only for its size but also for the non-vanilla aspects of its structure.

He expected banks would begin to look more and more to the small to mid-cap market for opportunities in both the leveraged finance and M&A space.

“Cross-selling small to mid cap with your pre-existing institutional business could generate significant untapped revenue or income from a customer base that has until recently been overlooked by a lot of the banks,” he said.

He expected to see more deals with a high yield element as well, particularly among those companies with a US nexus. “High yield issuance is very popular in the US presently, and so those with a US connection will be familiar with the financing structures, risks and rewards associated with the product,” he said.

Kirkland & Ellis’ Hong Kong-based debt finance partner, Ashley Young, agreed the use of high yield was set to become more common in Asian deals, including for recapitalisation transactions.

He thought that the trend would continue notwithstanding the liquidity that may be available from banks for the right deal.

“We may also see some secondary buyouts adding to the supply of deals, provided the exit multiples make sense, to support continuing fundraising efforts by sponsors for Asian funds,” he said.