Hyva sets precedent for Asia buyout funding through

HONG KONG Tue Mar 22, 2011 4:30am EDT

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HONG KONG (Reuters) - Buyouts in Asia are chiefly dependent on bank loans but in a first-of-its-kind for the region, the debt portion of one deal last week was financed entirely through a bond issue, likely opening a new funding route for private equity firms.

Dutch cylinder-maker Hyva's $375 million high-yield bond issue, which is part-funding its 525 million euro ($730 million) buyout by Hong Kong-based Unitas Capital and NWS Holdings, was a big hit with investors, especially U.S. investors.

High-yield buyout bonds are regularly seen overseas, but private equity buyouts in Asia are smaller than the United States or Europe, and easier and cheaper to finance with bank loans.

In December, the lead banks -- Bank of America Merrill Lynch (BAC.N), Goldman Sachs (GS.N), Nomura Holdings (8604.T) and Standard Chartered Bank (STAN.L) underwrote a $350 million five-year loan as a back-up to fund the buyout.

Buyers must show they have the funds to complete a buyout and the loan serves that purpose.

"Plan A was always the bond, and even if the syndication of the loan was highly successful, we would have still done the bond," said a source close to the deal.

But the loan received a lukewarm response in the market, picking up just two commitments in a syndication that began in January, and leaving the lead arrangers holding around $70 million each if the bond failed, sources with direct knowledge of the matter told Reuters.

That underlined the risks associated with the Hyva buyout, which made it a tough call for loans banks. But the bond was a big hit among investors, receiving about $1 billion in commitment ahead of pricing, according to Thomson Reuters publication IFR.

The sources in the story declined to be named because the discussions were private.

A handful of buyouts in Asia have featured a mix of loans and bonds, but according to Thomson Reuters data this is the first case of a buyout being purely financed by bonds.

RISKY BUSINESS

One downside on the bond is clear - it is more expensive.

Pricing for the loan to buy Hyva was at around 5.6 percent, while the bond priced at 8.625 percent, sources with direct knowledge of the matter said.

Loans banks are also relationship driven, and more willing to restructure debt if a company runs into trouble.

But while a bond is more expensive, it means Hyva will only need to pay interest and not principal on the debt during its lifetime, leaving more cash available for day-to-day operations.

Loans bankers also had concerns about cash being trapped in China, according to documents seen by Reuters. Asia provides around 70 percent of Hyva's sales revenue, with the majority of that from China, the sources said.

Analysts highlighted Hyva's risks while rating the bond.

"The rating on Hyva reflects the company's narrow product focus, potential margin compression, and its aggressive financial risk profile," said Standard & Poor's credit analyst Joe Poon.

Standard & Poor's rated Hyva's bond 'B+' while Fitch Ratings gave a 'BB-' rating and Moody's gave a B1, underlining the risks associated with the asset.

Poon added that the firm's good brand and low production costs, as well as its growth in emerging markets partly offset these factors, but the company's high leverage was a rating constraint.

Hyva's earnings halved in 2009, and while they have bounced back since, a repeat of that performance would trip covenants on loan documents.

LIQUIDITY LIMITS

Last year, Carlyle Group CYL.UL and TPG Capital TPG.UL successfully tapped Asia's abundant loan market liquidity for an A$1.99 billion ($2 billion) buyout of Australian healthcare company Healthscope, with a A$1.55 billion ($1.57 billion) loan from 30 banks.

The Hyva buyout has shown how risk can limit that liquidity for loans.

Leverage finance bankers say they see Healthscope as an asset in a defensive sector with stable earnings.

Hyva's European earnings were hit hard during the global financial crisis, and Unitas and NWS are relocating the company's headquarters to Asia to take advantage of strong sales in the region.

Bankers do not expect the Hyva bond to change Asia's buyout finance markets overnight, but Hyva has shown that buyouts in Asia can be financed purely through bonds, and may encourage others to follow that route.

Goldman Sachs, Nomura and Standard Chartered Bank declined to comment. Bank of America Merrill Lynch did not return calls requesting comment.

Unitas and NWS also declined to comment.

Unitas and NWS won the bidding for Hyva International in December 2010, backed by an underwritten loan. The acquisition from 3i Group (III.L) is expected to be complete at the end of March. The $375 million bond was borrowed through Hyva Global B.V.

(Editing by Denny Thomas and Muralikumar Anantharaman)

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