Riskier Leveraged Loans Are Starting to Crop Up in Asia
Riskier Leveraged Loans Are Starting to Crop Up in Asia Markets
(Bloomberg) -- Banks are coming under pressure to stomach more risk in Asia Pacific leveraged loans amid steeper competition and a dearth of jumbo deals from China, raising risks of bigger losses when the credit cycle turns.
The weakening of safeguards to protect lenders in leveraged loans in the U.S. and Europe has already been attracting scrutiny from the Federal Reserve, the European Central Bank and the Bank of England. While the bank-dominated loan market in Asia Pacific is smaller and stronger in quality, there are signs some deal terms are getting stretched. Australia has been an early adopter of some of these flexible terms and other parts of Asia may see spillover.
Read more about world’s biggest lev loan investors pushing back on terms
“It’s getting into the zone where the risk-reward isn’t matching up” with some deals, said Birendra Baid, Singapore-based head of loan syndication Asia at Deutsche Bank AG. “It needs to correct and what will trigger this would be one stuck deal which brings people back to reality.”
In Australia, private equity firms have already been getting loans with slacker terms, at times in so-called Term loan Bs (TLB), which are typically targeted to institutional investors and can have covenant-lite features. The TLB market offer more flexibility in aspects such as amortization, permitted acquisitions and dividend payments, according to Andrew Ashman, Singapore-based head of loan syndicate for Asia Pacific at Barclays Plc.
Infrastructure services provider Ventia Finco Pty Ltd., half owned by Apollo Management, extended maturities and increased the size of its existing covenant-lite TLB. KKR & Co. in May secured a seven-year cov-lite TLB for the acquisition of accounting and software and cloud business management company MYOB Group Ltd., while TPG Capital secured a six-year unitranche facility for the buyout of pet care company Greencross Ltd.
Big private equity funds doing large volume deals “might tap the U.S. or European markets as well as the Australian market, in which case they would have common terms,” said Bob Sahota, the co-founder of Revolution Asset Management, an investor in Australian and New Zealand leveraged loans. “If you repackage the loose terms to retail or highly volatile business, at some point you’re going to run into trouble.”
The A$2.15 billion ($1.5 billion) loan for Brookfield Business Partners’s buyout of hospital operator Healthscope Ltd. had leverage around 5.25 times. The six-year unitranche facility to support BGH Capital consortium’s acquisition of Australian educational services provider Navitas Ltd. had debt multiples around 6.3 times earnings before interest, tax, depreciation and amortization.
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- Terms seen in some recent deals -- such as leverage touching 5 to 5.5 times, tenors longer than five years, and bullet payments -- look more like ‘covenant-lite’ deals, according to Baid at Deutsche Bank. Given lower volumes, some banks are progressively loosening terms to try and win mandates, he said.
- “Sponsors are now comparing the financing terms on Asian deals to those being offered in the U.S. and European markets,” said Ashman of Barclays. “Given the increasing demand from the investor base, I expect there will be a shift to the TLB product in Asia.”
- “We are quite late in cycle,” said Revolution’s Sahota. “We’re looking at which industries, which businesses are defensive that can sustain a downturn.”
--With assistance from Carol Zhong.
To contact the reporter on this story: Mariko Ishikawa in Sydney at mishikawa9@bloomberg.net
To contact the editors responsible for this story: Andrew Monahan at amonahan@bloomberg.net, Ken McCallum
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