In March, GO Scale Capital — a fund sponsored by GSR Ventures and Oak Investment Partners — agreed to buy Philips Lumileds, choosing Bank of China to supply a $1.93bn financing for the acquisition. This included a $1.5bn syndicated loan and a $350m five year revolver.
BoC, as sole bookrunner and mandated lead arranger, kicked off syndication in June, bringing in China Eximbank, Bank of Communications, Bank of America Merrill Lynch and Rabobank. Individual allocations have not been disclosed but BoC is understood to have kept more than half of the $1.5bn on its books, and some bankers away from the deal reckon the level could even be as high as 80%.
The financing featured a seven year tenor and a 1% amortisation — terms that were off-putting for some international banks.
“Financially, [Philips Lumileds] is OK,” said a loan syndications banker away from the deal. “But we cannot have seven years with only 1% amortisation. It puts the ultimate risk on the lenders, but shareholders get dividends every year. For banks, the return — at around 3% — is not enough, as things can change a lot in seven years.”
Bankers close to the trade stressed there were covenants in place to protect lenders. “There is also a security package related to the real estate of the target,” said one banker.
The covenants involve the leverage and cash flow of the company, although details have not been disclosed publicly. Those on the deal also said that BoC had structured the financing and the covenants based on rigorous analysis of the target, its industry and cash flow. Covenant setting involved hard negotiations with Philips and sponsor GSR.
But the loans banker away from the deal said the security that was related to plants and factories may not be completely reliable, as technology could become obsolete over the life of the loan.
Another factor that restricted liquidity was the fact that many European banks were unfamiliar with sponsor GSR, and with BoC as an arranger. Some bankers had also expressed concerns over the sector of the target.
Under the acquisition agreement, GO Scale Capital will acquire an 80.1% interest in Lumileds for about $2.8bn and a deferred contingent payment of up to $100m. The transaction, which values the enterprise at $3.3bn, is expected to be completed this quarter.
Advantage to Chinese banks
BoC’s sole mandate and the successful completion of the deal marks yet another major China outbound acquisition that is being financed by one of the big mainland banks. BoC also clinched the mandate for a $800m loan for tech company OmniVision Technologies’ acquisition by Beijing-based Hua Capital, Citic Capital and Citic Securities subsidiary GoldStone Investment.
More recently, Shanghai Pudong Development Bank and Ping An Bank have been selected as underwriters and mandated lead arrangers for a $1.1bn loan for the take-private of New York-listed Wuxi PharmaTech (see separate story).
Yet another example is a $900m loan supplied by China Merchants Bank (CMB) and CMB Group member Wing Lung Bank for Nasdaq-listed Perfect World’s take-private by chairman Michael Yufeng Chi.
The trend has persisted as mainland banks look to support local funds in strategic investments overseas and have the ability to compete with foreign banks thanks to their larger balance sheets and bigger hold appetite.
“In terms of Chinese banks stepping in and taking away business from the syndicated loan market, I think we are seeing that and are going to continue to see that,” said a leveraged finance banker at an industry event held in May.
He said that while some of the big cross border acquisitions by Chinese state-owned companies would call for foreign bank technology and expertise, the trend of funds backed by the state owned Assets Supervision and Administration Commission of the State Council (Sasac) tying up financing from strong policy banks was here to stay.
While foreign and investment banks look to originate to distribute with terms that would both appeal to the borrower and attract new lenders, Chinese banks, which are enjoying abundant liquidity following monetary easing onshore, have more leeway when it comes to offering terms favourable to the borrower. Their pressure to sell down may not be the same as non-Chinese lenders, giving them more elbow room.
Competition from Chinese banks means less business for the rest, but international banks are not yet ready to offer much looser terms, according to one banker at a Japanese lender.
“Chinese banks have a lot of liquidity and are able to offer more relaxed terms,” said the banker. “If foreign banks also start loosening up terms a bit, I think it could get quite dangerous because as an industry that would encourage a lot of risk taking. I hope the market’s not moving that way.”