Investment banking: Eastern promise

"THE CENTRE OF gravity of the global financial markets has shifted to Asia," says the head of investment banking for the region at a top US bank over breakfast in Hong Kong. Although capital markets activity has slowed in Asia as a result of investor and issuer caution about events in the US, eastern markets are not as paralysed by a lack of liquidity as those in the west. There’s money to be put to work; the owners of that capital have just become a little more cautious as to how it should be deployed.

While the closing months of 2007 brought seemingly constant reports of losses at big banks and tightening of credit lines in western markets, in Asia China remained buoyant, sovereign funds and unharmed banks invested billions of dollars in wounded foreign institutions and deals kept closing. The leveraged buyout market is a good barometer of the difference: while private equity funds and corporates struggled to raise funds for large-scale deals in the US and Europe, Asian LBOs continued to close at an increasing rate (see graph, "Credit crunch? What credit crunch?").

Credit crunch? What credit crunch?

Asian LBO volumes 2004–2007

Source: Dealogic

Farhan Faruqui’s leveraged finance team at Citi in Hong Kong was busy during the worst of the credit market’s deterioration between June and September, at a time when their counterparts in the US and Europe must have found launching new deals next to impossible. The bank was the top bookrunner on acquisition loans during that period, with its nine deals totalling $4.27 billion. He offers one deal, the acquisition by private equity fund CVS Capital Partners Asia Pacific of Taiwanese curtain maker Nien Made for NT$18 billion ($549 million), as an example of how Asian leveraged deals closed successfully during the credit crunch.

"The CVC/Nien Made deal was sold in Taiwan," he says, "and was two times oversubscribed in the midst of the worst credit crisis in recent memory."

Local-currency liquidity is still largely supportive of deals, says Faruqui, and in such countries as Taiwan, Korea, China, India and Japan there are now pools of capital that can be put to work financing buyouts. Still, launching new deals at a time when global credit volatility is rocketing seems a little risky, however decoupled Asian markets might be from their western counterparts. Was there no worry that buyers would have to pay a hefty premium for their determination to proceed regardless of credit conditions elsewhere?

"The price impact in Asia of volatility in the credit markets has not impacted as much as we’ve seen in the US and Europe," says Faruqui. "In Asia we saw pricing move maybe 50 basis points or so – not dramatic enough for the deal to become unattractive in most cases but clearly credit market volatility has forced a repricing. People are of course paying a bit more but it’s nothing fatal, so price widening is not the reason why a given deal does or doesn’t get done."

What has changed across Asia, according to investment bankers who work on leveraged deals, is the composition of a typical syndicate. The Asian market is still mostly bank-driven, and deal participants tend to be much more conservative in the size of the stake they are happy with and the terms they demand – none of the "covenant-light madness we saw in the US," as one banker puts it. Now this trend towards conservative participation – de-risking, to use the bankers’ jargon – has become more pronounced.

Fine example

Take European buyout firm Permira’s ¥250 billion ($2.2 billion) acquisition of Japanese firm Arysta LifeScience, announced in October 2007. Although the deal was superficially unusual in that reluctance on the part of sellers makes Japanese LBOs rare, the composition of the syndicate was a fine example of how a more cautious attitude among banks has enabled the Asian leveraged market to be sustained.

"The concern when it was launched was ‘will the banks come in?’," says a source close to the deal. "But there’s a paucity of decent LBO opportunities in Asia and banks have capital that needs to be put to work."

The Japanese megabanks were initially reluctant to invest in the deal’s senior credit facilities but a broad range of banks did join in: a grand total of 28 institutions, including names as diverse as Aozora, Bayerische Hypo- und Vereinsbank, Chinatrust Commercial, Hanabank and State Bank of India.

Mandated lead arrangers at the height of the liquidity boom of the past few years tended to be happy to take as much of a deal for themselves as they were allocated; now they are keen to syndicate a deal down to spread risk.

This attitude prevails not just in the leveraged finance market but across Asian capital markets, according to a debt capital markets banker at a bulge-bracket bank. He says: "We’ve closed a couple of bond deals this year that were actually upsized in response to investor demand: there’s a clear preference for quality names, and an indication that investors in Asia are adopting a wait-and-see policy rather than completely withdrawing from the market."

This pattern also applies to equity markets. Many market participants saw the 17% slump in share price on the launch day of India’s Reliance Power IPO as proof of difficult markets and perhaps the end of the golden touch of billionaire Anil Ambani. But a regional head of markets and banking for Asia at a top investment bank offers a different perspective. "The fact that he got the deal done at all was impressive," he says, "and if he had waited a week it probably wouldn’t have closed at all. Deal timing is going to be a key issue going forward: issuers are going to have to be much more adept at exploiting windows of opportunity when markets can support them."