This article was written by Yuen-Yee Cho, Elizabeth Hundt Russell and Will Stawell.
2019 has seen a continued evolution of the Australasian leveraged loan market which builds on the product developments we have seen in recent years. This evolution is affecting both traditional senior bank financing as well as competing products in the form of the Unitranche and the Aussie Term Loan B or TLB. (See our prior article ‘The Aussie Term B vs Unitranche / other leveraged finance products').
This article outlines the key themes over the last year and how this has played out through live deals and the wider market.
The key themes we are seeing emerge are:
- Borrowers selecting between different structures strategically to suit the underlying credit and investment thesis
- an increase in the number and type of investors that are prepared to participate in non-traditional structures
- a “pick-and-mix” approach on key terms where Borrowers are prepared to agree terms not common to a specific structure in order to access other features; and
- alternative products exceeding bank debt volume. The examples below illustrate Term Loan Bs (TLBs) borrowed by Australian companies hitting a record high this year and combined Unitranche and TLB volume exceeding traditional commercial bank loans’ market share for leveraged buyouts.
|Source: Debtwire: APAC Chart of the Week: TLBs borrowed by Australian companies likely to hit record high in 2019.
|Source: Debtwire: APAC Chart of the Week: Unitranche/TLB market share exceeds traditional loans for Aussie, NZ LBOs.
The menu of available debt financing structures has expanded considerably beyond senior bank financings. Demonstrating the breadth of options, this year has seen, among other deals:
Borrowers are selecting structures to meet deal specific requirements around leverage, pricing, sizing and flexibility of terms, having regard to the Sponsor’s investment thesis, the business’s cashflow vs. capex needs and its market / sector specific issues.
- Brookfield’s ground-breaking $2.15bn senior bank financing to fund its dual track scheme/takeover of Healthscope;
- Navis Capital raising ~$330m senior bank debt financing to fund its acquisition of Device Technologies Australia
- KKR’s Australian Venue Company bank debt financing of various acquisitions, in particular the innovative financing of the Coles Queensland Pubs business
- PAG accessing a hybrid institutional/bank financing to fund its acquisition of the Craveable Brands business from Archer
- Experience Australia (Quadrant portfolio company) refinancing its senior bank debt into a unitranche facility
- BGH Capital’s $1.1bn unitranche facility to fund its take-private of ASX-listed Navitas
- TPG’s $660m unitranche facilities to fund its take-private of ASX-listed Greencross
- Goldman Sachs arranged a ~A$810m “covenanted” first lien/second lien TLB for Icon Cancer Care owed by Goldman Sachs PIA / QIC / Pagoda
- Advent International’s offshore unitranche financing of its acquisition of Transaction Services Group
- Apax Partners’ USD605m TLB to fund its buyout of New Zealand online classified operator Trade Me
- Healthe Care Australia Group’s multi-level refinancing of its existing facilities with new Senior, Opco Mezz and First Lien/Second Lien structures arranged by Goldman Sachs
We are seeing an increasing number and type of investors who are prepared to participate in non-traditional structures. This has been driven in part by:
- a hunt for size and yield – there are simply not enough vanilla senior lender deals available to satisfy investor demand to put capital to work at the return levels that are required
- the increasing familiarity with documentation and structures – while there are no APLMA forms for unitranche, institutional or Term Loan B deals, the number of participants in underwriting and / or arranging these deals (and the legal advisers involved) has remained relatively small. This has led to a level of harmonisation among documents permitting investors to focus on commercial terms.
- Adding to this liquidity is the relatively new phenomenon of listed credit funds coming to market (the most recent being KKR’s $925m ASX- Credit Income Fund).
Borrowers (and Arrangers) are also not feeling bound by the traditional definition of a product type – for example:
- including a single financial covenant in an TLB structure increases the investor universe prepared to participate in the deal enabling larger facility sizes and potentially reducing pricing;
- senior banks are accepting only 2 covenants (Net Leverage Ratio and either a Fixed Charge Coverage Ratio (FCCR) or Interest Cover Ratio (ICR)) instead of a traditional four covenants (Net Leverage, FCCR/ICR, Debt Service Coverage Ratio and Capital Expenditure limits) and more flexible terms;
- amortisation can be pushed down (on Senior Bank deals) or pushed up (on institutional deals) in exchange for pricing
- parameters for raising accordion / incremental facilities are getting more flexible across the board.
We expect that 2020 will see a continuation of the trends identified in this article and for transactions potentially to test and push the upper limits from a volume perspective of the unitranche and institutional / TLB markets.
"As legal counsel on all transactions discussed in this article, we at KWM feel privileged to have been at the forefront of the development of these new products and the evolution of the traditional products. Our market-leading experience uniquely positions us to advise our clients across the entire range of debt products and structures. We very much look forward to working with our clients in 2020 as the market continues to develop."
- Yuen-Yee Cho, Banking and Finance Partner.
You can find out more about KWM’s Acquisition and Leveraged Finance team here.