Reported in The Business Time (4/8/06)

“Debt funding for Asian buyouts has exploded this year and bankers expect borrowing activity to intensify as a growing flow of private equity seeks returns from leveraged buyouts in the region.

Buyout houses such as Kohlberg Kravis & Roberts and Carlyle Group are among a growing number of investors to set up or expand in Asia, ready to commit up to US$20 billion (RM73.6 million ), according to some estimates.”

Investment bankers like Morgan Stanley, Lehman Brothers, Merrill Lynch and other have been increased their manpower and setting up leverage finance shop to complement their advisory operations for mergers and acquisitions hoping to get more fees from the LBO’s rather than just M&A advice.
Furthermore there are some interesting statistics being highlighted:

Spending in Leveraged buyouts:

• Leveraged buyouts (LBOs) in Asia outside of Japan rose to US$10.1 billion (RM37 billion) in the first six months of 2006, more than triple year-earlier levels, figures from data firm Dealogic show. The amount spent in the first half has already surpassed the US$8.3 billion (RM30.5 billion) spent on leveraged buyouts in Asia in all of 2005.
• Asia ex-Japan loans for takeovers swelled to US$3 billion (RM11 billion) in the first six months of 2006 from US$1.6 billion (RM5.9 billion) in all of 2005, Reuters Basis Point data shows.

LBO deals to be based mainly on EBITDA:

• Peter Szekely, an executive director in Morgan Stanley’s Asian leveraged finance group, said on average buyers in LBO deals were now borrowing about five times their Ebitda, up from 3.5 times three years ago. Ebitda, or earnings before interest, tax, depreciation and amortisations, is sometimes used as a measure of operating profitability by analysts scanning a company’s credit status.

Debts Structure in LBO deals:

• An overwhelming majority of the borrowing for buyouts was in the form of senior debt, such as bank loans;
• Financial sponsors will use mezzanine and subordinated finance to increase returns but the most important component will still be the loan tranche;
• Mezzanine debt sits between senior debt and equity in a company ’s capital structure, and pays a higher return relative to senior debt or high-yield bonds. Its use in Asian LBO transactions has been limited because of small deal sizes and prohibitive costs. Moreover, banks in Asia were willing to extend more senior loans —the cheapest form of finance — than their counterparts in US and Europe;
• But bankers see other types of debt being added to the mix as Asian markets develop;
• If a company with a lot of assets but relatively thin cash flow  may well be able to get more senior debt on that company in Asia than in the US;
• LBO deals over the next year will feature products spanning the entire capital structure, including high-yield and mezzanine tranches and
• LBOs will be financed 60-75 per cent by debt.

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