February 14, 2020 / 9:06 AM / 9 days ago

Debt products converge Down Under

    * 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)
  
 
 
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