October 25, 2019 / 8:49 AM / 18 days ago

Risky loans flourish Down Under

    * Loans: Aussie leveraged financiers take page from Wall
Street
playbook

    By Mariko Ishikawa
    SYDNEY, Oct 25 (LPC) - Burgeoning non-bank liquidity is
helping to push the boundaries of leveraged loan terms Down
Under with a surge in Term loan B and unitranche financings more
common in the US and Europe.
    IFM, one of Australia’s largest infrastructure investors,
and private equity giant KKR are among the sponsors that have
wrapped up around US$3.91bn-equivalent in TLBs and unitranches
in the past month, underscoring the growing popularity of these
borrower-friendly products.
    TLBs carry little amortisation and can have covenant-lite
features, while unitranches fuse senior and subordinated parts
of debt financing into a single agreement. These structures,
that typically come with higher debt multiples and more
aggressive terms, are gaining wider acceptance in Australia and
other parts of Asia as investors chase yields amid a low
interest rate environment globally. 
    “Sponsors are increasingly turning to these flexible funding
structures, due to the benefits of higher leverage and looser
covenants resulting in greater scope to operate and grow their
businesses,” said Alastair Gourlay, a partner at law firm Baker
& McKenzie in Sydney. 
    “I expect Asian investors’ appetite for unitranche and TLBs
in Australia to continue to grow, particularly as the
environment in their home markets continue to be challenging.” 
    Andrew Ashman, head of loan syndicate for Asia Pacific at
Barclays, predicts the TLB format will gain more traction in
other developed markets in Asia.
    “Investors are becoming increasingly comfortable with
jurisdictions such as Singapore, Hong Kong and Korea. Deal flow
is a key challenge to building the institutional loan product in
other parts of Asia.”

    GROWING APPEAL
    Although still tiny compared to the US and European markets,
TLB and unitranche loans have gained popularity this year in
Australasia, raising around A$12.14bn (US$8.31bn) combined,
according to available Refinitiv LPC data.
    Unitranche loans have raised at least A$3.9bn this year in
Australasia, a sign that the product has caught on quickly since
it first gained traction in mid-2017 with a A$650m six-year
facility for the leveraged buyout of iNova Pharmaceuticals
(Australia). (See Table.)
    
 Deal                        Amount        Tenor
                                           (years)
 Unitranches:                                     
 Quadrant PE/Rockpool        ~A$210m             3
 Dining Group                              
 Quadrant PE/TEEG            A$434m              3
 Real Pet Food               A$475m              5
 BGH Capital                 A$1.125bn           6
 consortium/Navitas                        
 TPG Capital/Greencross      A$650m              6
                                                  
 TLBs:                                            
 KKR/Arnott's                US$865m-equi        7
                             v             
 KKR/Arnott's                A$315m              8
 IFM/Buckeye Partners        US$2.25bn           7
 PAG Asia (HK)/Craveable     ~A$300m             5
 Brands                                    
 Icon Group                  A$860m              5
 Permira Advisers/I-Med      A$150m              4
 Apax Partners/Trade Me      US$605m             7
 Apax Partners/Trade Me      NZ$276m              
 KKR/MYOB Group              US$468m             7
 KKR/MYOB Group              A$145m               
 EG Group                    A$400m             <6
 CIMIC, Apollo/Ventia        A$100m              7
    
    In the most recent examples, IFM raised a US$2.25bn
seven-year covenant-lite TLB supporting its acquisition of US
pipeline operator Buckeye Partners, while KKR closed a
US$865m-equivalent seven-year TLB for its buyout of Campbell
Soup's snacks unit Arnott's and some of its Asia-Pacific
operations. Both financings met with strong demand in
syndication, pricing below, or at the tighter end of price
guidance. Buckeye scrapped a proposed bond issue and increased
the TLB size, while KKR lifted the Australian dollar portion of
its borrowing. 
    “The Australian economy has had a long run of uninterrupted
economic growth. Perhaps economic conditions are softer today
than we have enjoyed at various points in the recent past, but
still on a relative basis, Australia remains a pretty attractive
place to invest from both a debt and equity perspective,” said
Richard Satchwell, Australia co-head at Barclays Capital Asia. 

    INSTITUTIONAL CAPITAL
    Australia has the world’s third largest pool of retirement
savings and some of that US$1.9trn in capital is trickling into
alternative assets like private debt. First State Super, the
A$90bn superannuation fund, is planning to boost domestic direct
lending to as much as A$3bn in the next few years. 
    Partners Group and KKR are separately seeking to raise as
much as A$1.375bn combined from their Australian-listed credit
trusts to extend loans to companies globally. 
    “In Australia the rapid growth in the number and size of
local credit funds and listed debt funds has supported more
Australian dollar-denominated unitranche and TLB issuance,” said
Peter Graf, head of leveraged finance for Australia at Credit
Suisse. In the long term, the market is likely to continue to
shift towards more of an institutional or credit fund-led
financing market as happened in the US and Europe, he said. 
    While the surplus of liquidity may help the development of
innovative financing solutions, there are concerns the terms on
some loans are getting stretched, mirroring the US and European
markets where lending standards are coming under greater
scrutiny.
    In September, Moody’s said covenant quality of North
American loans remained weak even after improvements in the
first quarter after hitting a new low last year. 
    "Some of the terms that we see in the US market are starting
to come into the Australian market with lack of covenant
protection. We have participated in a couple of those
transactions but only where we are financing robust,
high-quality businesses that are resilient to an economic
downturn that have clear and transparent cash flows," said
Sydney-based Bob Sahota, chief investment officer at Revolution
Asset Management, which is planning to launch its second private
credit fund of up to A$200m after closing a A$205m fund in June.
    “Where investors need to be wary is where loose terms with
lack of covenant protection are extended to companies that are
in volatile industries and sectors,” he said. “Without these key
protections through the cycle investors don’t have any triggers
to arrest any underperformance.”

 (
Reporting By Mariko Ishikawa; editing by Prakash Chakravarti and
Chris Mangham)
  
 
 
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