Tougher lenders in Asia (ex-Japan perhaps)

Private equity ambitions curbed by lenders in Asia
Fri Jul 13, 2007 7:35AM EDT
By Alison Tudor - Analysis

TOKYO (Reuters) - Private equity firms eyeing jumbo acquisitions in Asia are facing more demanding terms from their lenders, but fierce competition among banks for new business means the region's buyout boom is unlikely to be derailed.

A tougher stance from lenders could make takeovers -- particularly massive ones -- more expensive and more difficult for buyout funds, which prefer to pay for companies using a little of their own equity and a lot of debt.

Deal-hungry private equity firms that have had their way with banks during the buyout boom may now be forced to pay higher interest rates on the debt, or use less debt in bigger, riskier deals, making mega deals harder to structure and potentially reducing their returns.
"This is the first sign that the pendulum may be swinging back the other way - investors have linked arms and pushed back," said Tim Donahue, head of leveraged finance Asia Pacific at JP Morgan, where he helps private equity funds raise debt for deals.

Debt providers have become more risk averse following a global spike in credit costs caused by rising defaults in U.S. mortgage-related bonds, another highly-leveraged product.

Bankers estimate credit spreads for Asian buyouts have widened by about 20-30 basis points in the last few weeks, equivalent to a couple of million dollars of extra cost on a billion-dollar deal. If credit spreads continue to widen, clinching bigger deals will get even tougher.
"Until recently we'd push as hard as we could to get more debt, but now credit committees at banks will play more of a watchdog role, which is healthy for the market," said one manager of a private equity firm in Australia, the biggest buyout market in Asia so far in 2007.
U.S. private equity firm TPG cited credit market volatility as a reason for recently pulling out of bidding for Australian retailer Coles. Financial sources said higher credit costs may have been the final straw after a protracted bidding war with another retailer, Wesfarmers

Private equity firms announced $22 billion worth of deals in Asia-Pacific excluding Japan in the first half of this year, another record for the industry, according to data provider Thomson Financial.

Loan volume for LBOs across the Asia Pacific hit $15.8 billion in the first half of 2007, already above the 2006 total of $13.4 billion and up from $3 billion in 2004, according to Reuters unit Basis Point, which tracks acquisition finance.

Defaults are near record lows in Asia Pacific, but ratings agency Moody's said the benign environment has turned mildly negative, with debt-laden buyouts a major factor.

A STEP TOO FAR?
Asia's loan market is dominated by banks hungry for new business and with a sea of capital to lend, which ensures there will be plenty of appetite to fund most buyouts -- even if terms are tougher.

But the loose lending terms that buyout firms have been able to demand on massive deals, including so-called "covenant lite" structures that lack traditional protection offered to buyers of the debt, are expected to be harder to come by.

A barometer of funds' ability to raise debt in the region will be TPG's $1.4 billion acquisition of Singapore's United Test and Assembly Center (UTAC). Banks that funded the deal with the less-stringent terms may have a harder time syndicating the loan to other buyers.
Lenders have begun asking for a few covenants to be put back on loans and for higher spreads on the biggest deals, which could make buyouts more expensive and less profitable.

"While inconvenient, that's not a deal-breaker," said another private equity fund manager based in Australia.
Buyouts in Asia are smaller than in the West, where the push-back from debt lenders is greatest, and leverage in the region is lower, which means any backlash should be less severe.

Debt multiples on Asian deals average about 5-6 times earnings before interest, tax, depreciation and amortization (EBITDA), far below the 9-11 times on some recent U.S. deals.

And with fewer assets for sale, Asia lacks the glut of deals seen in the west, although deal sizes in the region are creeping higher. Last year private equity firms announced 15 buyouts over $1 billion across the Asia Pacific, up from three in 2003, Thomson Financial said.
A small but growing band of institutions that buy the more risky parts of Asian buyout debt, such as hedge funds and managers of pools of loans such as collateralized loan obligations, are stepping up the pressure on private equity.

But for now, deals continue to flow.

"There is push back on deals that are structured 'lite', but if a deal is reasonably structured, well protected and at an appropriate leverage multiple then it will get done," said Farhan Faruqui, head of global loans Asia Pacific for Citigroup.