Tesco’s attempt to sell Homeplus in a deal that could value the asset at around $5.6bn is being closely followed by leveraged finance bankers in Asia. Dealogic data shows year-to-date leveraged buyout related loan volume for Asia ex-Japan lags last year’s by 3% but deal activity is down 60%, with just two deals.
Three bidders are believed to be vying for the Tesco asset, including private equity firms Carlyle, MBK Partners and KKR. They have each lined up financings from different lender groups, mostly comprising Korean banks and funds.
What is notable about the trade is that all three financings feature a junior or mezzanine component, similar to a landmark W1,345bn ($1.2bn) financing in 2014 that helped Carlyle clinch the bid for security company ADT Korea in 2014.
That loan included a W360bn five year and a one month mezzanine facility, but finding liquidity for junior debt in a market where the main investors were local funds, unfamiliar with subordination, posed a big challenge for underwriter UBS.
But things appear to have come a long way since then, with Korea’s National Pension Service (NPS) understood to be providing a letter of commitment to Korean bidder MBK Partners, according to a banker supporting Carlyle’s bid.
“NPS has provided an LOC,” he said. “As part of the financing package, this is very unusual as pension funds like to come in as investors after the final, winning bid.”
Meanwhile, Korea Exchange Bank, Korea Industrial Bank, Korea Investment & Securities and Nonghyup Bank are expected to supply the senior portion of Carlyle’s loan, said the banker. This senior portion will account for 50%-60% of the total purchase consideration. Of the remaining, UBS will be sole underwriter of a mezzanine financing that will be in the “low to mid teens” of the purchase consideration in percentage terms, a second source told GlobalCapital Asia.
They declined to disclose the Ebitda multiple for the financing, but a banker at a Korean lender working on the Carlyle financing said local banks tend to pay more attention to the debt-to-equity ratio rather than just debt-to-Ebitda. They also look at debt vis-à-vis cash flows of the company to determine its ability to service any loans, including by disposal of assets, he added.
Staple appearance
Another standout aspect of the Tesco fundraising is the presence of a staple financing, a rarity in Asia, said sources.
A five year staple financing facility, featuring drawn debt of over $3bn, was put in place before the bids started coming through. A staple financing signals to the market the leverage and terms for financing an asset on sale. It is, in theory, open to any bidder.
HSBC and BNP Paribas were the original lenders in the staple financing, and were joined by Australia and New Zealand Bank later and by Sumitomo Mitsui Banking Corp thereafter, said a banker familiar with the trade. He declined to comment on whether the staple had been activated.
While many market participants compared the Tesco financing structure to that used for ADT, bankers said there were key differences between the two companies, with Homeplus having a lot of real estate to back the fundraising.
“ADT was a highly leveraged transaction and there may be a great deal of similarity [with Tesco] on the leverage multiple,” said the banker familiar with staple financing. “But the deal we’re looking at now is three times bigger in quantum. And Homeplus has the advantage of a lot of freehold property in its portfolio."
Carlyle sealed its purchase of ADT from owner Tyco for $1.93bn in March 2014, representing a purchase multiple of about 10.7x target Ebitda. This meant the debt portion had a leverage of 7x Ebitda, but getting lenders on board for such a highly leveraged loan in senior was not possible, so a junior tranche had to be fashioned.
Abundant liquidity
Homeplus however may have other challenges getting banks on board. Unlike ADT, which was profitable, Homeplus is lossmaking. Tesco’s Korean business recorded a net loss of W298bn in the 12 months ending February 2014, according to the Financial Times. Figures were not available on the corporate website.
The banker on the staple financing said local regulations aimed at protecting mom-and-pop stores did not help Homeplus's numbers. One such rule requires large department stores to close on Sundays in certain jurisdictions.
But what might work in Homeplus’s favour is local liquidity, he added.
"The deal is in Korean won and comes at a unique moment in the market, where Korean banks have an enormous amount of liquidity," he said. "This is why banks can offer aggressive financing packages."
That also however means that the final fundraising is likely to be more of a local affair.
“We’re not involved in this stage but from what I hear, most of the local funds houses are working on this deal,” said a banker at a foreign lender active in Korean deals. “It will most probably be done by local firms instead of foreign banks.”
Market participants declined to disclose the size of the financing or purchase consideration. But local media house Yonhap News Agency speculated that the minimum price would be set around W6.7tr won ($5.6bn).
The bid is likely to be awarded by the end of this week or early next week as Tesco wants to wind up the deal before the end of this year, said one of the sources.