Issuance in Asia-Pacific (excluding Japan) through Q3 2019 came in at US$253.4 billion, down on the US$408.6 billion figure recorded over the comparable period in 2018. Volume has shown a similar decline, dropping from 1,040 deals during the first nine months of 2018, to 573 by Q3 2019.
A combination of trade tensions between the US and China, valuation gaps between buyers and sellers and a proclivity among private equity sponsors to use less debt in financial structures in order to accelerate dry powder deployment, have all weighed on issuance.
Trade troubles create pressure
Amid the ongoing trade war, outbound M&A from China into North America and Western Europe fell from US$58.2 billion and US$90.6 billion, respectively, in 2016 to US$2.96 billion and US$7.3 billion in 2019 year to date.
This drop in cross-border activity out of Asia has affected leveraged finance issuance, with fewer big-ticket deals in the market seeking funding.
The uncertainty around future trading relationships between Asia and the West has also made buyers of assets more cautious about high deal valuations, while vendors have continued to hold out for full prices. This disconnect has seen potential deals fall away. In June, for example, the founder of Korean gaming giant Nexon, Jungju Kim, called off a potential US$16 billion deal after bids from strategic buyers and private equity suitors came in below his expectations.
But even when private equity sponsors do agree on valuations with vendors, demand for financing has been muted as firms have written bigger equity checks to deploy large Asia-focused funds raised during the last two years. Chinese firm Hillhouse Capital raised a US$10.6 billion fund for Asian deals in 2018 and KKR secured US$9.3 billion for its Asia fund the year before. With deal activity reduced, firms have opted to increase equity into deals to deploy these war chests.
Repricing and refinancing top the bill
Against this backdrop of subdued deal activity and corporate caution, most issuance in the region has come from refinancing and repricing. These deals, worth US$144.8 billion, accounted for 17.97% of issuance in 2019. General corporate and M&A activity deals (including buyouts) worth US$53.4 billion and US$32.03 billion, respectively, accounted for just 6.63% and 3.97% of the use of proceeds.
Although new money deals have been thin on the ground, refinancing has been a source of significant capital. Bain Capital-backed Toshiba Memory Chip, for example, secured a loan package of around US$11.7 billion earlier this year.
When new deals have come to market, however, lenders have shown appetite. South Korean private equity firm MBK Partner’s purchase of the Asian portfolio of Godiva Chocolates from Turkish owner Yildiz, for example, secured a reported US$903 million funding package from a consortium of Japanese banks and mezzanine lenders at an aggressive debt-to-EBITDA multiple of around 10x.
Tighter terms dominate
While deals like the Godiva financing indicate that Asian lenders have been willing to lend more aggressively than in the past, loan terms, leverage levels and pricing have remained conservative when compared to the US and Europe.
Unlike Western markets, which are driven by institutional investors, Asia is still very much a bank-led market, holding and syndicating loans directly. Aggressive term loan B and unitranche structures are incredibly rare. The presence of overseas sponsors in the market has driven a slight pivot to more borrower-friendly terms, but senior debt is still the preserve of the senior banks. Debt multiples seldom exceed five- or six-times EBITDA and loans are tightly covenanted when compared to Western deals.
A positive outlook for Asia
Despite a slow year, there is optimism that 2020 Asian issuance will improve as M&A volumes pick up and trade disputes resolve. The support that PE firms have enjoyed in the fundraising market points to a positive long-term outlook.
Asian debt also remains cheap. In markets like Japan, finance is currently pricing as low as 100bps to 200bps. Debt in other Asian markets is more expensive, but still reasonably priced by historic standards, with opening margins in the Libor +300-400bps range for senior secured loans. The liquidity is there for deals as soon as geopolitical tensions subside and markets stabilize.