Perfect World is the latest firm from its industry to embark on a take-private. It has picked China Merchants Bank and Wing Lung Bank to supply a $900m loan for the deal, pursuant to a debt commitment letter, it said this week.
Under the take-private, Perfect World would be merged with an entity called Merger Sub and continue to operate as a subsidiary of parent Perfect Peony Holding.
There have been take-privates of Chinese gaming companies before. Perfect World’s deal follows those for Giant Interactive and Shanda Games in 2014. But those met with a mixed reception.
Giant tapped the offshore syndicated loan market for a $850m five year borrowing that closed with a syndicate of 15 banks. Shanda Games was also planning a syndication for a loan of up to $850m for its take-private, but changes in the acquiring consortium led to that offshore financing being shelved.
The pricing, leverage, structure and tenor of the loan for the Perfect World take-private were not disclosed in this week's public document, but bankers speculated that pricing would probably have come in at between 500bp-600bp. But while this is a margin that may attract banks who are seeing pricing drop elsewhere, there is no certainty that the deal will go into general syndication.
“If they are underwriting it, then it will have a broader syndication. But they [CMB and Wing Lung Bank] could hold the amount too,” said a leveraged finance banker who worked on Giant's loan.
If it were to attempt a syndication, however, there is no guarantee it would be successful. Challenges remain in the form of the company’s industry and asset-light nature.
Perfect World, like Giant and Shanda, generates most of its revenue in China. Overseas investors' recourse to assets and cashflows would be limited, as they would be lending to a holdco company that owns the shares of the operating target but would have no cash flows of its own.
Not only are offshore lenders further away from the asset because of this structure, they are also structurally subordinated to investors onshore.
“This looks like it’s more domestic focused,” said a senior leveraged finance banker. “If borrowers could get more liquidity for these kind of deals [in the social gaming sector] then they would. Shanda didn’t get done [offshore] because it couldn’t get the financing together.”
A number of foreign banks were in talks with Shanda for its financing but those lenders lost interest after major international private equity investors exited and were replaced by Chinese investors in the buyout consortium.
Sector woes
Although Giant demonstrated that there is some appetite for lending to the gaming industry, it is not necessarily a template for others, said market participants. This is because such companies’ revenues depend on consumer preferences, which can change rapidly.
Perfect World, which had a market capitalisation of $971m on April 28, posted revenue growth of 18.8% year on year in the third quarter of 2014, at Rmb974.3m ($158.7m).
Moreover, in syndication it could also prove hard for the Perfect World loan to firm up a group of mandated lead arrangers and bookrunners featuring big international banks, said the senior leveraged finance banker. Such lenders prefer to join transactions early, at the top level, and are very clear about their motivations when funding borrowers in sectors such as online gaming, he said.
“There has to be a particular angle for them [foreign banks]. Maybe they have a close relationship with the chairman or there is a plan to list the company on the Hong Kong stock exchange after 12 months, and they want to pick up some of that business. There can be a number of reasons.”
Bankers reckoned that if the loan were to go into a broader syndication, it could attract liquidity from Chinese and Taiwanese lenders, as Giant’s did — although even this would not be guaranteed.
“I think the Chinese and some of the Taiwanese would step up, but then again, the Taiwanese are no longer participating the way they used to [like in Giant’s time],” said the senior leveraged finance banker.
Taiwanese banks have been under intense pressure to contain their lending exposure to China, amid an economic slowdown in the Mainland and some high profile defaults that have stung lenders from Taiwan.