IFR-KKR’s Perpetual buyout tests recovery of leveraged finance

(The following story appeared in the Oct. 30 issue of IFR
Asia, a Thomson Reuters publication)

By Stephen Aldred

HONG KONG, Oct 30 (IFR) – Buoyed by the successful
syndication of Healthscope, Asia-Pacific leveraged finance
bankers are now mulling a far bigger challenge: the loan to
back Kohlberg Kravis Roberts’ (KKR.N: ) planned US$1.73bn buyout
of Australian fund manager Perpetual.

While the Healthscope loan breezed through syndication,
picking up a handful of institutional investors and a mix of
small and mid-sized regional banks on the way to a solid 28.6%
selldown, the Perpetual buyout offers a sterner test of the
capacity of the region’s recovering leveraged finance industry.

A successful deal could pave the way for more leveraged
acquisitions in Asia’s financial sector, but bankers warn that
the nature of the target limits the pool of banks that can
lend, and the risks associated with the deal are greater, and
more difficult to assess.

“There is not a lot of precedent in this part of the world
for this kind of deal,” said one Australia-based loans

Perpetual said last week KKR’s offer was too low but it
would continue talks and hand over limited financial
information to the private equity firm, hinting that it may
agree to a higher bid.

KKR has engaged Credit Suisse, Nomura International,
Barclays Capital and local boutique BKK as advisers, and the
banks are currently gauging appetite for a loan to back the

Lev fin bankers said they would expect the debt to be at
around A$420m-$525m (US$411m-$513m), assuming leverage levels
of about 3.0 times to a maximum 3.5 times Ebitda.

With no comparable deal in the Asia-Pacific region, the
buyouts of British fund manager Jupiter Asset Management by
private equity group TA Associates in 2007 and of Gartmore
Investment Management by sponsor Hellmann & Friedman Advisors
in 2006 may offer better comps.

Both deals were completed with conservative leverage levels
of 3.0 to 3.5 times.

In contrast, Carlyle Group and TPG Capital raised A$1.55bn
at leverage levels of 4.0 times senior debt to Ebitda and 4.7
times total debt to Ebitda for their A$1.99bn acquisition of

With a mandated lead arranger group of 17 and a total of 30
lenders, including eight Asian banks lending A$245m in general
syndication, the Healthscope acquisition showed the appetite
available for the right structure at the right price.

But leveraged loan bankers viewed Healthscope as a safe bet
– like all successful Asian LBOs completed since the Lehman
Brothers bankruptcy. The healthcare services provider is
supported by taxpayer-funded and non-cyclical revenues, while
the loan is secured over physical assets.

“Even if the company fails, you have access to the … actual
buildings. You sell them,” said one banker from a lender to the
buyout loan.

And while the US$915m-equivalent LBO loan backing KKR’s
buyout of Oriental Brewery in South Korea in 2009 was a gutsy
deal at the time – the first leveraged buyout to enter the
Asian market after the Lehman collapse – the target was a
duopoly South Korean beer producer, the very definition of a
safe bet.

“Safe bet” is not the way leveraged loan bankers would
describe the Perpetual buyout. Many describe it as
“interesting”, others add that it is “certainly one to watch”.
The question is how many will watch, and how many will

Some banks that participated in the Healthscope syndication
simply cannot lend to buyouts of financial institutions as an
institutional policy. These banks take the view that the lack
of physical assets as security and the inherent volatility of
the sector make such deals off-limits for leveraging.

“It will be a test, because many banks do not have the
skills to appraise the asset. You need to be able to assess how
regulations and investors affect the earnings,” said a Hong
Kong-based M&A banker whose bank does not lend to buyouts in
the financial sector.

The same source noted the risk inherent in the nature of
the assets, saying: “The assets include people, the fund
managers standing in the company, and if it goes wrong, they
can walk. The sponsors need to align their interests with these
guys. So do the banks.”

Not surprisingly, Perpetual’s star fund managers, John
Sevior and Matt Williams, have received considerable coverage
as “kingmakers” since KKR’s bid was announced, based on their
pivotal role in any buyout deal.

A further risk, say leverage bankers, is the volatility of
earnings derived from managing investments. If stock values
tumble, so does the value of funds under management.

“[Perpetual’s value is] strongly correlated to the stock
exchange, which makes it volatile,” said another Hong
Kong-based buyout banker studying the transaction. “If the
funds under management fall, gearing rises as the Ebitda
compresses quickly.”

This is why the gearing was kept low on both the 722m pound
(US$1.15bn) LBO of Jupiter and the buyout of Gartmore, which
featured a 300m pound term loan B, structured in line with the
US market and targeted mainly at funds.

Both the 2007 recap of Gartmore and the 510m pound senior
debt backing the Jupiter buyout were covenant-free financings,
featuring bond-style incurrence tests only, structures that
targeted institutional investor liquidity and avoided tripping
gearing covenants.

Those structures, however, have been off the table since
the onset of the financial crisis. Asia’s leveraged finance
volumes remain far short of the US$20bn-plus completed in 2007,
and the industry is still recovering from a number of
restructurings in Australia and New Zealand that are preventing
banks from proposing risky structures and high leverage

“This is not 2006 or 2007, so you won’t see covenant-lite
loans. That won’t happen,” said another Australian loans
syndicator studying the asset.

In the deal’s favour, however, is the renewed confidence in
leveraged structures in the Asia-Pacific market on the back of
the Healthscope deal, and another successful syndication of an
LBO loan for education services company Study Group
International. That means the region’s leveraged finance
bankers are keen to at least run a rule over the deal despite
the risks.

Confidence in underwriting is also back. The OB financing
in 2009 helped reintroduce that concept when it comes to LBOs
when the deal, underwritten by HSBC, JP Morgan, Nomura and
Standard Chartered Bank, became one of the standout successes
of the year. The SGX loan last week also emphasised the return
of underwriting, after ANZ and Deutsche Bank agreed to back a
US$3.5bn acquisition loan.

The risks are far higher on Perpetual, though, but
confidence in underwritten structures has certainly returned.

“There’s a long way to go, and they’re not close to
structuring a deal yet – just engaging banks right now,” said
the Australian loans syndicator.

IFR-KKR’s Perpetual buyout tests recovery of leveraged finance