Asia buyouts struggle as banks clamp down on lending

"What we notice is banks are working through commitments they made earlier, and new deals in general are struggling for liquidity," Aart Jan den Hartog, head of Asia Pacific sponsor coverage at ING Bank, said at a conference in Hong Kong, Reuters reported. "Bankers do not want to catch a falling knife, because the market in which you price a deal today ... pricing might have moved away from you tomorrow."

Debt-to-EBITDA multiples on deals in Asia are around 4.68x compared to 6-7x in Europe and the US. The region's first high-yield bond buyout came earlier this year when Unitas Capital bought Hyva Holdings from 3i for an enterprise value of EUR525 million ($761.5 million). A $375 million high-yield bond replaced a $350 million, five-year loan acquisition facility underwritten by several banks because it was expected to offer more flexibility in growing the company.

Asia's leveraged loan volume is $2.8 billion year to date, predominantly for deals in Japan and Australia, according to Thomson Reuters. Recent leveraged transactions include Bain Capital's purchase of Australian accounting software firm MYOB from Archer Capital and HarbourVest Partners for A$1.3 billion, which included a A$575 million loan. Affinity Equity Partners has reportedly secured A$580 million in financing for its forthcoming buyout of Primo Smallgoods.

The MYOB transaction is instructive because, as final bids were being prepared, Bain and rival KKR were struggling to generate sufficient leverage due to weak global markets. Bain, it was said, raised the equity portion of its bid from 40% to 50% with a view to refinancing the deal once the appetite for high-yield bonds was restored.

Sage Group, the UK software maker, entered the race at the last minute and appeared to have trumped Bain and KKR, only to be forced out by weak capital markets. A sharp decline in stock prices globally meant that the MYOB deal could amount to more than 25% of Sage's market value, requiring a shareholder vote for it to go through.

Nevertheless, the situation outlines the power of strategic investors who are able to consider deals largely unencumbered by leverage issues and concerns about return on capital invested.

This is particularly the case for Japanese corporations, which have the luxury of low borrowing costs and a strong currency when pursuing outbound deals. The Carlyle Group's investment in Indonesia's GarudaFood supposedly floundered as the valuation soared beyond comfort levels in order to overcome a rival bid from Suntory.

"When a corporate is willing and able to pay in the region of 13-15x EBTIDA it is extremely difficult for PE firms to compete," Simon Pillar, managing director at Pacific Equity Partners, told AVCJ in September. "Whenever you are up against a corporate investor you have to consider their cost of capital and strategic intent. These can be formidable challenges in the bidding process."

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• Topics
• Buyouts
• Financing
• Australasia
• North Asia
• Australia
• Japan
• buyout
• Structured finance
• Bain Capital Asia
• KKR
• The Carlyle Group
• Pacific Equity Partners