Malaysia Airports Holdings launched its €500m seven year into general syndication in January. The company was raising the money to back its acquisition of Istanbul Sabiha Gokcen (ISG) International Airport.
Led by BNP Paribas, CIMB and Deutsche Bank, the facility paid a margin of 275bp over Euribor at launch. But after getting a positive response, the leads decided to shave 25bp.
Reverse flex is a common feature in European and US transactions, but in Asia it remains a rarity.
In Malaysia Airports’ case, despite the thinning of pricing, there was no pushback by lenders that had initially expressed an interest. Final allocations are due at the end of this week and will reveal a heavy scaleback, with 16 banks from across Europe, Middle East and Japan.
GCAsia_cartoon_1396_malaysia_airports_300px Ready, set, go
The reverse flex has certainly been a boon for the leads and the borrower. The three bookrunners funded the deal at the end of 2014, as the borrower needed the money to go ahead with the acquisition. Aware that things might change, the leads had consulted potential lenders before syndication and informed them of the possibility of a reverse flex.
Sensibly, the bookrunners wanted to keep their options open in terms of pricing because of the nature of acquisition loans. There's typically a lag between funding and the close of syndication, and market conditions can change a lot.
Rather than locking in a price that would ultimately be unfavourable to the borrower, a strategy that allows for some back and forth between investors and the leads results in a good outcome for all parties. In tighter conditions, of course, lenders may flex the deal to negotiate more favourable pricing for themselves.
And a lot has indeed changed between December and March in terms of the cost of funding in euros. The European Central Bank introduced quantitative easing monetary earlier this month and the impact is apparent in three month Euribor, which have gone from 82bp at the beginning of December 2014, when the deal was funded, to 39bp at the beginning of March.
What bodes well for the loan market is the willingness of Asian banks to stay the course despite a reduction in returns. That is sure to be an encouraging sign for borrowers hoping to finance acquisitions by tapping liquidity in Asia.
But it's worth noting that the Malaysia Airports case is not a one-size-fits-all example. Several factors - a European target, a borrower that is a sovereign entity, the ECB’s dovish approach - allowed for the reverse flex to be pulled off smoothly.
That's not to say there won't be more chances to do the same, though. European assets are getting cheaper and Asian companies are in expansion mode. For the right company and the right deal, lenders are showing that it pays to be flexible.