Edition:
India

Mariko Ishikawa

Asia set for private debt boom

16 Oct 2020

SYDNEY, Oct 16 (LPC) - Money managers are ramping up fundraising across a range of private debt strategies in Asia Pacific as market dislocation triggered by the coronavirus pandemic sets the scene for a boom.

Aussie lev fin points to revival

29 May 2020

* Loans: Riskier loans test resilience of institutional market By Mariko Ishikawa SYDNEY, May 29 (LPC) - The leveraged finance market Down Under is showing signs of revival, with a couple of event-driven loans injecting life into a market that slowed to a trickle when the coronavirus pandemic hit. Infrastructure services company Ventia and private equity firm Madison Dearborn Partners are leading a US$3.81bn-equivalent pipeline of sizeable term loan Bs, in a test of resilience for institutional loans in Australasia. Ventia is eyeing a A$525m-equivalent (US$340m) dual-currency add-on TLB to fund its acquisition of Broadspectrum, the Australian services unit of Spain's Ferrovial. Madison Dearborn is in the market for a A$725m TLB backing its buyout of a stake in disability employment services provider Advanced Personnel Management. “The outlook for the Australasian leveraged loan markets looks cautiously optimistic, taking its lead from the US high-yield bond and TLB markets, which continue to see new issuance accelerate despite the toll Covid-19 is having on the country,” said Peter Graf, Credit Suisse's head of leveraged finance for Australia. Other Australasian borrowers tapping the TLB markets include gaming machine manufacturer Aristocrat Leisure, data centre company AirTrunk and mental health, rehabilitation, oncology and cardiology services provider Healthe Care Specialty. MIXED RESULTS While bankers and loan investors welcome the return of TLBs, there is caution over the fallout from Covid-19 and how deals should be structured and priced. “There are likely to be bumps in the road as more new issuance tests the boundaries on what is executable in the post Covid-19 world,” said Graf. “Phrases like ‘essential services, ‘Ebitdac’ (Ebitda adjusted for Covid-19 impact) and ‘Covid-safe’ are the new buzzwords for credit markets in 2020.” TLB borrowers have had mixed results in recent weeks. Earlier in May, Aristocrat Leisure, a frequent borrower, won a vote of confidence from US investors as it increased and tightened terms on a US$500m incremental TLB. The covenant-lite deal had been marketed at 400bp over Libor and a 97 original issue discount, but the terms were revised tighter to 375bp over Libor and 98 OID. Pricing is still juicier than the 175bp margin offered on loans of US$1.3bn and US$950m that priced in May 2018. In April, AirTrunk flexed pricing on a multi-currency TLB of around A$1.6bn by 75bp to 450bp over BBSY/SOR/Hibor. The loan has an average life of 4.75 years and has still not closed after having been initially launched in mid-February. In early March, before the coronavirus outbreak triggered a lockdown in Australia, cancer and cardiac service provider GenesisCare sweetened pricing on the euro tranche of a US$1.002bn-equivalent TLB backing its acquisition of US-based 21st Century Oncology. Ventia, which maintains and manages public and private infrastructure assets in Australia and New Zealand, is offering margins of 450bp–475bp over Libor for US dollars and 550bp–575bp over BBSY for Australian dollars – up around 100bp from its June 2019 financing. (See Table.) “The balance of power has shifted in favour of the lenders, in contrast to the borrowers’ market that we have seen over the last few years,” said Alok Jhingan, head of acquisition and syndicated finance for Australia and New Zealand at Citigroup. Most of the TLBs for Australasian borrowers include tranches in US dollars, euros or pounds sterling, given that the Australian dollar market for this product is still small. Nonetheless, the local market has grown rapidly since the first Aussie dollar TLB in May 2015 – a A$359m tranche of a A$900m borrowing for LS Newco (now Ventia). It has also emerged as a viable alternative to the offshore TLB and bank liquidity in Australia. “Aussie dollar tranches in TLBs are thinly traded and tend to be smaller in size and illiquid versus other currencies,” said Jhingan. “Investors are going to continue to demand a premium on Aussie dollar tranches versus the offshore tranches. The difference in spreads may increase to reflect the rise in swap costs post Covid-19.” PIPELINE BUILDS Successful outcomes for the loans for Ventia and Madison Dearborn could set the stage for other financings. While several asset sales and carve-outs were put on hold or cancelled due to the pandemic, cashed-up sponsors are looking for bargains. Funds under management with Australian PEs and venture capital firms rose to a new high of A$33bn in June 2019, according to Preqin & Australian Investment Council. “There is still a lot of dry powder sitting at private equity firms,” said Bob Sahota, chief investment officer at Revolution Asset Management, which invests in leveraged loans in Australia and New Zealand. “It’s the case of how to get deals funded when there may not be many banks willing to underwrite loans.” Melbourne-based Village Roadshow granted PE firm BGH Capital exclusive access to its books this month, even after the suitor cut its bid by 40% and made it conditional on Village reopening its theme parks and cinemas. Commonwealth Bank of Australia agreed to sell its 55% stake in Colonial First State, while binding bids for embattled airline Virgin Holding Australia are due on June 12. Financial services company Pioneer Credit is discussing alternative proposals after Carlyle Group terminated its buyout in April. Term Loan Bs for Australasian borrowers Borrower Tenor Margin Date of Tenor Margin (years) (bp) previous (years) (bp) financings Ventia/Broadsp 6 450-474, June 2019 ~7 350, ectrum 550-575 462.5 (A$) (A$) Madison 6 (1L) 550 (1L) Dearborn/APM Madison 7 (2L) 950 (2L) Dearborn/APM Aristocrat ~4.5 375 May 2018 ~6.5 175 Leisure AirTrunk 5 450 April 2019 5 (1L), 275 5.5 (1L), (2L) 800 (2L) Healthe Care 5 (1L) 475 (1L) Specialty Healthe Care 5.5 800 (2L) Specialty GenesisCare/21 7 500, 475 August st Century (€), 525 2018 Oncology (A$) TradeMe 6.25 400 April 2019 7 (1L) 425 Source: Refinitiv LPC (Reporting By Mariko Ishikawa; editing by Prakash Chakravarti and Chris Mangham)

Aussie loan costs push higher

29 Apr 2020

SYDNEY, April 29 (LPC) - Australian companies are paying more for syndicated loans as banks face pressure on their own cost of funding, reversing a downward trend that had pushed pricing to a five-year low in 2019.

Coronavirus rocks Asia Pacific lending

31 Mar 2020

SYDNEY, March 31 (LPC) - Syndicated lending in Asia Pacific plunged to the slowest quarter in eight years as the coronavirus pandemic took its toll with several countries imposing lockdowns and grinding a range of business activities to a halt.

Debt products converge Down Under

14 Feb 2020

* Loans: Lines blur between bank and institutional markets for leveraged finance By Mariko Ishikawa SYDNEY, Feb 14 (LPC) - Leveraged finance products are starting to show signs of convergence in the growing Australasian market as borrowers and private equity sponsors take advantage of abundant liquidity from both bank lenders and institutional investors. The development, which is unique in the region, is reshaping the leveraged finance landscape Down Under, with more banks participating in lucrative Term Loan B and unitranche financings that are traditionally targeted at institutional investors. Banks are also coming under pressure to offer greater flexibility in conventional deals to compete with TLBs and unitranches that have gained popularity in Australasia in recent years, thanks to the burgeoning non-bank liquidity and the presence of global private equity firms that have imported these products from the US and European markets. As the market continues to evolve, certain features and types of creditors in different products are starting to overlap. Peter Graf, head of leveraged finance for Australia at Credit Suisse, said issuers appear to be prioritising flexibility and pushing to include certain terms from other debt markets to address their broader strategic objectives, which has seen the line between the various markets blur. The Swiss bank and Australian institutional investor Metrics Credit Partners are arranging a A$180m (US$121m) unitranche financing backing PE firm Anchorage Capital Partners’ leveraged buyout of Australian rail leasing business CF Asia Pacific Group. That deal is the latest unitranche facility to be offered to the wider market in syndication, in a departure from the standard practice in the US and Europe. The US$1bn-equivalent seven-year covenant-lite TLB for Australian cancer and cardiac care service provider Genesis Care is also currently in syndication to lenders including banks. KKR Credit Markets, Morgan Stanley, Jefferies, Bank of America and HSBC are arranging that deal. Some borrowers are mixing and matching different terms and products to meet their objectives. Healthe Care Australia, a unit of China’s Luye Group, is raising A$734m through a combination of loan products for its subsidiaries. Healthe Care Specialty is seeking an unrated first and second-lien TLB, while Healthe Care Surgical is seeking senior bank and mezzanine facilities. “Since alternative financing solutions such as TLBs and unitranches have entered the Australian market, banks have begun to loosen terms, providing borrowers with higher leverage, less amortisation, wider covenant headroom and more flexibility for incremental debt in an effort to remain competitive,” said Alok Jhingan, head of acquisition and syndicated finance for Australia and New Zealand at Citigroup. AUSSIE CONTRAST The participation of banks and investors in Australasian deals is in contrast to the far more developed and liquid markets in the US and Europe, where TLBs and unitranches are mainly targeted at institutional investors. Typically, TLBs in the US and Europe carry covenant-lite features, little amortisation and external credit ratings. However, in Australia some TLBs have carried restrictions on borrowers with some of the facilities being unrated. They may be syndicated on a cross-border basis, with tranches denominated in Aussie and New Zealand dollars usually making up a smaller part of the overall borrowing. Unitranches fuse senior and subordinated parts of debt financing into one instrument with bullet repayment and typically carry a single covenant relating to leverage. They tend to be smaller than TLBs and can be faster to execute as they often involve fewer creditors. However, in Australia, sponsors have also funded larger buyouts with unitranches that have been distributed widely. “First-lien and second-lien unrated TLBs with covenants seem to be a feature of our own Australian market. It is like a blend between a cov-lite TLB and a unitranche which typically comes with a single leverage covenant,” said Jhingan. Last November, oncology provider Icon Group’s unrated A$810m-equivalent TLB attracted a mix of banks and institutions. Around the same time, a number of banks participated alongside institutional investors in a five-year loan of about A$300m for the LBO of Craveable Brands by PE firm PAG Asia Capital and a US$890m-equivalent first-lien TLB for KKR’s acquisition of Campbell Soup's snacks unit Arnott's and some of its Asia-Pacific operations. The strong demand for the cov-lite TLB for Arnott’s led to a A$185m increase in the Australian dollar tranche and a reduction of US$100m to the US dollar piece. “Australian or New Zealand TLBs on a standalone basis are likely to become more common for small to mid-sized transactions, but in the short to medium term the largest transactions will likely continue to have US dollar or euro tranches alongside an Australian dollar tranche to ensure sufficient lender support,” said Credit Suisse’s Graf. HUNT FOR YIELD The growth in number and types of financiers that are prepared to offer looser terms in the region is driven in part by their hunt for yield amid a low interest rate environment globally and an increased familiarity with alternative debt structures. “You might find that some offshore foreign banks that are looking for asset growth are prepared to allocate part of their capital to high-yield opportunities, but it’s not the norm for the four domestic major banks,” said Andrew Lockhart, Sydney-based managing partner of Metrics Credit Partners. In 2019, Australasia raised at least A$10.5bn through TLBs and no less than A$4.7bn unitranches, according to available Refinitiv LPC data. That was on the back of a nearly 40% year-on-year surge in overall M&A loans volume. The pipeline continues to build as M&A dealmaking heats up. (See Table.) “We expect leveraged loans and broader acquisition finance to remain strong through 2020, with large amounts of private capital on the debt and equity side seeking to put money to work,” said Peter Colwell, head of leveraged finance and loan syndication at Jefferies Australia. “There is increasing liquidity for local-currency TLBs and unitranches in Australia and New Zealand from both credit funds and banks in the Asia Pacific region. More deal flow will assist in driving that liquidity.” Australasian Unitranches and Term Loan Bs Deal Amount (m) Margins Tenor (bp) (years) Unitranches Anchorage/ CF Asia Pacific A$180 600 5-6 Quadrant PE/ QMS Media A$460 550 (TL), 5, 6 375 (RCF) 2019 Total (eight deals) ˜A$4,254 + 475-600 3-6 US$150 2018 Total (two deals) ˜A$223 550 6 Term Loan Bs Genesis Care US$1,000 7 Trade Me US$602 375-400 Lineage Logistics/ Emergent US$500 300 ˜5 Cold Healthe Care Specialty A$305 425 5 Healthe Care Specialty A$105 800 5.5 2019 Total (nine deals) A$3,142 + 450-800 5-8 US$4,646 (AUD) 2018 Total (three deals) A$1,100 + 387.5-450 6-7 £310 (AUD) (Reporting By Mariko Ishikawa; editing by Prakash Chakravarti and Steve Garton)

Direct lending grows Down Under

06 Dec 2019

* Loans: Institutional investors expand into investment-grade financings

Risky loans flourish Down Under

25 Oct 2019

* 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)

Aussie property pipeline builds

18 Oct 2019

* Loans: Foreign banks and alternative debt providers capitalise on opportunities

Brookfield fires up Australasia loans

27 Sep 2019

* Loans: Canadian investment firm taps third acquisition financing

Woolworths shops for long tenors

20 Sep 2019

* Loans: Australian borrowers tap Asian lenders as pricing dips

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