L Capital Asia is seeking five year money for an LBO to purchase an 80% stake in a Chinese fashion firm operating in the mid-market segment, said sources familiar with the situation. They declined to disclose the name of the target as it is still confidential.
Citi is sole bookrunner on the loan, which is among the few LBO financings to back an acquisition where the target is a fashion brand. The rarity element makes it tricky to assess its value, said a Taipei-based banker who has long tracked L Capital Asia’s activities.
“L Capital is different from other private equity firms like Baring or TPG,” he said. “Those private equity firms have a more diversified portfolio, while L Capital invests mainly in fashion and design brands. Some Taiwanese banks might struggle to evaluate these brands’ value.”
Another banker said smaller lenders from Taiwan, which are often a strong source of liquidity for Asian loans, will be hesitant about joining, because they are unfamiliar with L Capital Asia’s strategy and its targets.
But Citi is taking a different approach with the deal, scheduling a bank meeting in Shanghai on Thursday. The location of the roadshow suggests that Citi is primarily looking at Chinese liquidity for the loan, a logical solution considering the target is on the mainland, said a source close to the matter.
Adding to the challenge is the absence of many precedents. But assessing brand value is an important part of credit appraisal in any LBO. The fashion industry, in this case, should not be substantially harder to evaluate, he said.
Tame leverage
L Capital Asia focuses on targets with an enterprise value of $100m-$1bn, it said on its website. The firm usually goes for minority stakes of $30m-$150m and looks to turn around the investment and exit within three to five years.
In this case however, it is seeking a majority stake, which is why it decided to go for a leveraged buyout, said the first banker.
The loan represents a leverage of a low two times, he added. But while this looks low compared with the four times-six times leverages in other buyouts in Asia, the difference is because the fashion industry is less leverageable as an asset, he added. This means leverage has to be kept within a reasonable range to generate enough bank liquidity.
The lower leverage is likely to pay off for L Capital Asia, especially as the loan is its debut syndicated deal. But the fund is understood to have sealed small club deals in the past.
It is offering a juicy 430bp over dollar Libor margin, which sources said was compelling.
Two ticket levels are available for lenders keen to participate. Banks committing $25m will earn fees of 225bp, while those chipping in $15m will net 175bp. If lenders put in their commitments before December 15, they will be rewarded with an early bird fee of 25bp. Otherwise, all commitments have to be submitted by the end of December.
Although L Capital Asia is part of luxury group LVMH, it is managed independently from the parent company. The other private equity arms of LVMH are L Capital (Europe) and L Real Estate.