Deal makers in the ex-Japan Asia region are hopeful a new asset class - acquisitions financed through securitization - may emerge in the near future.
While acquisitions by leveraged buyout (LBO) and private equity firms have typically been funded via alternative means in Asia, recent spread contraction in the ABS market has increased its attractiveness to these companies. In addition, real estate investors are exploring funding their purchases in this way.
A quick look at how the Asian LBO market is developing reveals why arrangers are excited. According to Dealogic, the business saw $10.75 billion in LBOs through 76 deals in 2005, a sizeable increase on the $5.59 billion from 65 transactions recorded in 2004.
Those figures are still dwarfed by the markets in Europe and United States, which were respectively worth $132.9 billion and $109.3 billion in 2005. However, the relatively large number of undervalued companies throughout Asia has caught the attention of several LBO firms.
Private equity interest
Private equity firms such as The Carlyle Group, CCMP Capital and Newbridge Capital - all long established in Asia - face increasing competition from Bain Capital, Blackstone Group and Kohlberg Kravis Roberts & Co., who established regional offices last year.
Significantly, the newcomers to Asia have already used securitization to fund LBOs in their home markets. For example, last December, Bain Capital, Carlyle and Thomas H. Lee Partners financed $1.7 billion of the $2.4 billion acquisition of Dunkin Brands by securitizing existing and future assets generated by the fast food group.
Logically, it follows that as long as ABS offers competitive pricing against other avenues - specifically high-yield bonds and syndicated loans that have been used in Asia to date - LBO firms will replicate their U.S. experience in Asia.
ABS bankers are hopeful this will happen, although there is unlikely to be a surge of transactions in the short-term.
"The use of securitization for acquisition financing as an asset class would be a natural progression for the Asian market," suggests Raj Shourie, head of Asian ABS at Deutsche Bank. "Securitization has been used as a means to diversify funds, manage balance sheets, lower the overall cost of debt, as an asset liability management tool and to finance infrastructure projects. This is just a stage beyond that. We have not seen it thus far in ex-Japan Asia, but a couple of deals have been completed in Japan, which is further along the curve. Logically, this will filter through to the rest of the region at some point."
Spread contraction
One noticeable trend in Asian countries with developed securitization markets, such as Korea and Singapore, has been spread contraction in recent years. In Korea, for instance, pricing has come down to as low as 13 basis points over Libor on cross-border transactions from 45 basis points in the past two years.
According to Greg Park, Calyon's head of Asian securitization, this tightening raises the possibility of an LBO-related asset class emerging.
"Transactions such as the Korea First Bank - now known as Standard Chartered First Bank - cross-border RMBS, Hyundai Capital auto loans, Hsinchu RMBS (Taiwan) as well as select CMBS deals in Singapore have set important pricing benchmarks in different asset classes," Park says. "Furthermore, execution time has shortened in Asian markets, particularly Korea and Singapore."
"Foreign investors interested in acquiring Asian property, consumer portfolios or even a bank may consider securitization as an alternative to high yield bonds or loans," Park adds. "The participation of a triple-A monoline in a structure could make the all-in cost of funding and certainty of execution very attractive."
According to sources, investment banks - acting on behalf of private equity firms - have approached monolines for quotes on Korean transactions. Unfortunately, details are few and far between at this stage.
Template for Asia
In the U.S., such transactions have been a win-win for borrowers and ABS investors; the former as interest payments are less than those on high yield deals, while still offering a pickup to investors over similarly rated ABS deals.
One investor suggested equivalent Asian transactions would be much sought after. "I have not been approached directly about specific deals as yet, but would be very interested to talk to people when there is something concrete," he states. "It would be interesting to see what kind of companies would be involved, but I'd certainly want to look at good deals as logically they would give more spread."
Japan offers a template for the rest of Asia to follow. Morgan Stanley arranged in 2001 an 245 billion ($2.1 billion) deal to finance the acquisition of the bankrupt Life Company by Aiful Corp., one of the country's biggest consumer finance firms.
The transaction refinanced a bridge loan extended by Morgan Stanley to Aiful to make the acquisition, and attracted bids from local and international buyers. It was followed by several smaller purchases of consumer finance assets.
In the past year, Japanese real estate acquisitions by U.S. investors have also been funded through securitization. In May 2005, LaSalle Investment Management aligned itself with Tokyo Tatemono, setting up an SPV to purchase 19 properties from Japan Tobacco and selling ABS paper backed by rents to investors.
American Insurance Group followed suit last July by working with the property developer Urban Group to purchase properties in Tokyo and Osaka, subsequently issuing bonds backed by sales and rental income (ASR, 07/04/05).
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