leveraged finance special(4)

BUMPER YEARAsia Pacific targeted financial sponsor M&A buyout1 volume by country.

LESS LIQUIDITY
Indeed, the surge of LBO deals that started in 2005 saw many international and Asian banks jump on the bandwagon. For instance, UBS launched a new Asian leveraged team in 2005, while Natixis, one of the latest institutions to join the fray, set up a leveraged finance operation in November 2006. Other European and US banks that have put in place dedicated leveraged finance teams in Hong Kong include Fortis Bank, GE Capital and Royal Bank of Scotland. WestLB, traditionally a participant in Asian loan transactions, also stepped up its efforts in 2006 to take on mandated lead arranger (MLA) role.

Asian banks that have followed suit include Bank of China, Taiwanese institutions such as Chinatrust Commercial Bank and Fubon Bank as well as Singapore's UOB, which set up its LBO team in late 2006.

Which of these players will persevere in the business remains to be seen. If many retreat, and others move away from participatory roles to MLA mandates, the next question is: where is liquidity going to come from?

A banker who declined to be named says: “Tapping liquidity is always a problem for every bank. Recent events will make banks assess market liquidity even more carefully as we go forward, and the more sizeable deals will depend on how smart the sell-down strategy is.”

Nevertheless, as Ajay Sawhney, managing director and head of leveraged finance and financial sponsors coverage in Asia Pacific (not including Japan and Australia) at Merrill Lynch, insists, it is not all gloom and doom in the Asian bank market. “There is no despondency in Asia. Even if the US and European banks restrain their appetite, there are still large banks in Asia which will have the capacity to fund transactions,” he says.

In addition to banks, specialised lenders are looking forward to helping close some of the gap that has opened up as a result of the overall reduction in available debt finance. Mezzanine houses such as AMCG and Intermediate Capital Group (ICG) in Hong Kong are open for business and ready to support deals with subordinated debt and even equity

Says Ferrigno: “There was a period of time when the opportunities for our type of capital was limited, because many banks were providing debt at relatively low rates and up to excessive levels of leverage. Firms like us can help private equity funds mitigate the adverse impact of higher lending standards by replacing some of their senior debt that banks do not provide.”

ICG, which raised a $500 million Asia-dedicated fund last year, is already preparing to raise another fund this year, says Chris Heine, managing director of ICG in Asia. “We are a strong investor in the mezzanine business in both Europe and Asia, and the recent changes in credit markets have made mezzanine an even more important part of the capital structure of buyouts. In our second fund, our methodology, credit discipline and investing strategy won't change.”

UNPREDICTABLE DEAL FLOW
In light of the ongoing recalibration of the debt market, the LBO deal pipeline for 2008 is not easy to predict. However, bankers expect a clearer picture to emerge soon.

“Because the Asia LBO market is so fragmented, it is hard to say which country will see more deals this year. Singapore, for instance, turned out to be the country with the biggest transaction in the region last year with a decent pipeline. Nonetheless, we expect a few interesting, sizeable transactions to come up this year,” says Chow of UBS. “There is a huge amount of private equity money out there and banks are still open for business. But whether we will see a big jump in volume from last year, that's something we can't say for sure at this juncture.”

Oaktree's Kerins offers this country-by-country outlook: “The Japan market is highly liquid and many of the deals done there were highly leveraged and over-valued. In Korea, there is a lot of liquidity but not a lot of international activity as the market is dominated primarily by domestic funds. Taiwan also has an enormous amount of liquidity in the banking system and spreads are still attractive although they have risen since last year. But you don't see highly leveraged transactions done there. China is still a big question as to how the buyout market is going to take shape.”

But even though a sudden explosion of buyout activity in Asia's key economies is unlikely, interest in the region from international groups remains strong, not least because LBO prospects in Europe and North America appear even more uncertain. Leading global private equity firms Kohlberg Kravis Roberts, Blackstone, TPG and Permira are widely expected to step up their pursuit of investment strategies for the region.

However, asks Heine at ICG, will there be enough large buyout opportunities? Pointing to the recent emergence of Asia-dedicated buyout funds with up to $5 billion in commitments, he says: “Fund sizes are getting larger, and the size of the transaction that sponsors look at has also increased. We have yet to see whether the funds can deploy their capital in a large number of big buyouts. In fact in 2007 there were less $1 billion buyouts consummated in Asia than in 2006.”

Kerins expects to see a lot of activity in the mid-market. “We target our fundraising toward the area of greatest activity. In Asia, most private equity activity takes place in the mid-market and we expect this to continue.”

MARQUEE DEALSThe 10 largest financial sponsor buyouts in Asia (ex Japan) 2007.