Leveraged loan volumes in Asia may decline in 2013 as Europe’s debt crisis and China’s slowdown limits mergers and acquisitions while private equity firms shy away from selling businesses at discounted prices, lenders say.
Companies are disagreeing on the value of assets amid increased global economic uncertainty, making them cautious about large transactions, according to HSBC Holdings Plc, Credit Agricole SA and Mizuho Corporate Bank Ltd. Public-to-private M&A deals in the Asia-Pacific region are down 30 percent this half to date versus the first six months of the year while private-to-public deals slumped 34 percent, according to data compiled by Bloomberg.
“M&A volumes this year have been lamentable but it’s not because of any lack of buyside equity and debt capital to get deals done,” said Lyndon Hsu, the head of leveraged and acquisition finance, Asia-Pacific, at HSBC in Hong Kong. “Banks in the region have plenty of money to deploy and there’s a lot of equity capital floating around, but as Europe chokes on its own economic and financial problems and growth in China slows, transaction flows are drying up.”
Global dealmaking plunged 27 percent since June 30 to $743 billion from the first six months of 2012, according to data compiled by Bloomberg, as confidence among chief executive officers in Europe declined to the lowest level since the financial crisis and the International Monetary Fund cut growth forecasts. The sluggish economic outlook is also constraining demand for initial public offerings with investors less willing to bet on first-time share sales against such a backdrop, according Citigroup Inc.
“Financial sponsors are going through a philosophical and practical adjustment in terms of lower deal ticket size and returns they’d like to generate from transactions,” Hsu said ahead of an Asia Pacific Loan Market Association Leveraged Finance seminar in Hong Kong today. “At the same time, a lot of companies are building up huge amounts of cash but not being able to find appropriate investments, and certainly not willing to sell, either to competitors or private equity sponsors.”
Leveraged finance and acquisition bankers expect corporate-to-corporate deals to provide some respite from the slump in activity, and banks in the region have demonstrated a huge appetite to lend.
Cnooc Ltd. received more than $15 billion of commitments from banks in the space of a month, people familiar with the matter said last week, as it works to acquire Calgary-based Nexen Inc. That deal is awaiting approval from Canada’s government which earlier this month rejected Malaysia’s Petroliam Nasional Bhd.’s offer for Progress Energy Resources Corp. on national interest grounds.
AIA Group Ltd. attracted some $8 billion for a one-year bridge loan to back its potential purchase of ING Groep NV’s Asian insurance operations, people familiar with the matter said in July. Lenders had their pledges scaled back to $1.73 billion in total after AIA decided to only buy the assets in Malaysia.
“It’s been very patchy in 2012 for leveraged financings, the real story has been the prevalence of corporate acquisition financing rather than the traditional private equity sponsor-backed leveraged buyouts,” said David Irvine, a Hong Kong-based partner at Linklaters LLP, which advised on Bright Food Group Co.’s acquisition of a majority stake in Weetabix Ltd. and CVC Asia Pacific Ltd.’s HK$2.95 billion ($381 million) deal to acquire broadband assets from City Telecom HK Ltd.
“Banks are open for business but faced with the so-called U.S. fiscal cliff, the Eurozone crisis and a slowdown in China, buyers and sellers are just being cautious right now,” he said.
The U.S. economy grew 2 percent in the third quarter, according to Commerce Department data released Oct. 26, as companies cut forecasts on slowing growth in Europe and Asia. Economic expansion may be stunted if the expiration of tax breaks and implementation of spending cuts, due to come into effect at midnight in the U.S. on Dec. 31, results in a large reduction in the budget deficit.
The biggest M&A transaction involving an Asian company this year is Softbank Corp.’s acquisition of a 70 percent stake in Sprint Nextel Corp., followed by Cnooc’s proposed purchase of Nexen, Bloomberg data show. Overseas Union Enterprise Ltd., part of Lippo Group, said earlier this month it’s considering options that include a bid for Fraser & Neave Ltd. shares, posing a threat to Thai billionaire Charoen Sirivadhanabhakdi’s offer for the company. F&N has a market value of S$13.2 billion ($10.8 billion).
“In terms of LBOs, there were a few in Japan and Australia in the first half but outside of that, the market was pretty quiet,” Linklaters’ Irvine said.
Inghams Enterprises Pty, Australia’s largest poultry processor, was put up for sale in July and has attracted interest from global buyout firms Blackstone Group LP and Affinity Equity Partners Ltd., Reuters reported earlier this month. Ironbridge Capital, a Sydney-based private equity firm, has appointed Macquarie Group Ltd. to advise on a possible sale of EnviroWaste Services Ltd., a New Zealand waste management business that may be worth more than NZ$500 million ($411 million), a person familiar with the matter said in May.
Other leveraged finance transactions requiring large amounts of bank debt this year have been sparked by strategic motives, Irvine said.
U.S. Leveraged Loans
PTT Exploration & Production Pcl, Thailand’s biggest publicly traded oil and gas explorer, bought Cove Energy Plc to secure assets in East Africa while Hong Kong Exchanges & Clearing Ltd.’s purchase of the London Metal Exchange “was about China wanting access to the world’s largest commodities exchange,” he said. “So for some corporate transactions there are strategic reasons which wouldn’t necessarily apply to private equity deals.”
U.S. leveraged loan volumes total $456.5 billion since Dec. 31 versus $536.3 billion the same period of 2011, according to data compiled by Bloomberg. Deposits into U.S. loan funds are gaining momentum, recording positive net inflows every week for more than four straight months, Bank of America Corp. said in an Oct. 25 report.
Syndicated loan volumes in the Asia-Pacific region outside of Japan for all types of financing have dropped 30 percent to $261.8 billion this year compared with the same period of 2011, the data show.
“I think we’ll see a slow start to 2013 in Asia which isn’t necessarily a bad thing as some uncertainty in Europe is ironed out and we get the U.S. and China elections out of the way,” said Rupert Manduke-Curtis, the Hong Kong-based head of origination for Asia ex-Japan at Mizuho. “After that we may see more outbound M&A emanating from Asia but in this macroeconomic environment it can be hard to accurately value companies and come to an agreement on price.”