Cheaper funds in Europe lure loan business away from Asia

Asian loan bankers have been expecting a large volume of outbound Asian M&A activity into Europe this year. And M&A volumes for Chinese or Hong Kong acquirers buying European targets in 2015 have already surpassed those for the whole of last year. Volumes stand at $32.09bn via 40 deals, up from $6.92bn via 39 deals in 2014, according to Dealogic.

Amid this surge two big financings are under way — one for Hutchison Whampoa’s £9.25bn acquisition of O2 UK from Telefónica and another for China National Chemical Corp’s €7.1bn ($7.68bn) takeover of Italian tyre maker Pirelli.

The Hutchison financing is in the form of a £6bn 24 month bridge by HSBC, while the Pirelli acquisition funding is being underwritten by JP Morgan. The size of the Pirelli loan has not been disclosed and there are rumours that ChemChina could sweeten the offer, as Pirelli’s shares are trading at a premium to the bid price.

The presence of a large Asian corporate should mean business for syndicate desks in the region. But while a portion of these financings could find its way on to Asian loan books, most of the business is set to be placed in Europe.

There are already signs of this happening, as a bank meeting to arrange the financing for ChemChina’s acquisition of Pirelli was due to be held in Milan on April 1 as GlobalCapital Asia went to press.

The main advantage of the European market is the tightening of yields for investment grade credits. In March, for example, French firm Publicis refinanced a €1.56bn credit line put in place for the acquisition of US marketing firm Sapient via a $1.6bn facility comprising loans with 2018, 2019 and 2020 maturities. The deal paid a 60bp margin.

“In Europe, BBB space companies can get yields of around 80bp [for plain vanilla term loans],” said a credit banker at a European lender. “In comparison to that, pricing of over 1% that issuers [in Asia] are paying looks quite high.”

In both Hutchison and ChemChina’s cases, the targets are well recognised in Europe and can get competitive pricing, said bankers.

“Placement is driven by what is the takeout route planned,” said a Hong Kong based banker at the investment banking arm of a European bank. “Where is there more liquidity? Which region knows the asset well? These are the questions that need to be answered.”

Another reason it may not make sense to tap the Asian syndicated loan market for the Pirelli and O2 deals is that the acquisition financings are likely to be non recourse at the target level — meaning that recourse would be limited to certain assets of the target — and with no recourse at all to the acquirer.

That means that the way banks in Asia view the company being acquired would play an important role, said market participants.

“Asian banks would prefer recourse to the acquirer, with which they have a relationship, of course,” said a Hong Kong based banker at a large international commercial bank.

But there is no reason for it to be a recourse financing, he said, as the targets in both instances are well known and can fetch cost effective pricing in their own right.

In the case of the £6bn 24 month bridge being supplied by HSBC for the O2 takeover, Hutchison or MergeCo — a subsidiary that has entered into the agreement with Telefónica — will not be required to provide any credit support in connection with the facility agreement.

There is also a likelihood in Pirelli’s case that a term loan B tranche could form part of the take-out, as sole underwriter JP Morgan has a wide base in North America, where investors are familiar with Pirelli and its operations, said a senior loan syndications banker.

But some bankers said at least a slice of the Pirelli loan would be funded by banks in Asia to ensure ChemChina’s relationships were leveraged adequately, to bring in diversity and to ensure a good pricing mix.

“The lead will do everything to support sponsors and buyers,” said a head of loans syndications. “It’s not like they will invite everyone but they won’t exclude any banks that have a relationship with the Chinese acquirer. In Asia it will be a very targeted syndication.”