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By Alison Tudor
TOKYO, Jan 16 (Reuters) - Investment banks Lehman Brothers LEH.N and JPMorgan (JPM.N) have managed to rake together enough partners to fund the buyout of Japanese agrichemical firm Arysta, proving multi-billion dollar leveraged deals are possible in Asia despite a log-jam in global credit markets.
European buyout firm Permira [PERM.UL] bought Arysta for about 250 billion yen ($2.3 billion) in October and then charged Lehman and JPMorgan with bringing together a syndicate of investors to help pay for the deal.
The two banks have sealed the crucial first step of the financing by persuading 14 investors to underwrite the buyout, said three sources directly involved with the deal.
The Arysta acquisition was the biggest leveraged buyout (LBO) in Japan last year and the fourth-largest ever in the world’s second-biggest economy, according to researchers at Thomson Financial. Unfortunately for the banks, it coincided with a worldwide crisis of confidence in credit markets.
Investors who had been falling over each other to finance mega-LBOs in the United States and Europe were suddenly reluctant to sign more business, in case they were caught holding all the debt and could not resell some on to others.
The lining up of 14 banks for the 140 billion yen ($1.3 billion) of senior debt for Arysta underscores the differences of the Asian market.
“The Asian model of financing may have seemed less sophisticated before the credit crisis, but now deals are getting done in Asia while the market generally is taking a big hit in places like the U.S. and Europe,” said Dennis Barsky, partner at law firm Jones Day, who is experienced in Asian leveraged finance.
However, the Asian market is still several years from reaching the level of deal flow seen and slickness of structuring achieved in the West, he added.
Asian banks largely missed opportunities to help finance the buyout boom in recent years, as many were still putting their houses back in order after the 1997/98 Asian financial crisis and the bursting of Japan’s bubble economy.
The smaller and less mature buyout market did not attract as many of the institutional investors, such as hedge funds and CDO players. Asia largely remained an old-fashioned, buy-and-hold market dominated by the banks.
This quaintness has now become a strength, as institutional investors looking for quick returns have had their fingers burnt.
Lehman and JPMorgan even managed to shift the most risky debt in Arysta’s structure. They have found underwriters for 25 billion yen ($234 million) of financing comprising debt to be repaid in cash and payment-in-kind notes, said the sources, who asked not to be identified as the deal was ongoing.
Their job was helped by the notes’ rarity value in Asia — Arysta is one of the biggest such issues ever in the region — as well as their relatively high yiedd, 4 percent and 10 percent respectively.
The fact that Permira stumped up a lot of its own money also boosted confidence. Normally, a private equity fund would provide 25-30 percent of the cost and lender banks the rest. Permira funded about 44 percent of the Arysta buyout.
Pricing seems to be in line with the market at 225 basis points over the interbank cost of borrowing for the 5-year tranche, and 275 bps over for the 7-year tranche.
It wasn’t all plain sailing for Lehman and JPMorgan.
The team got off to a shaky start as none of the three big Japanese banks — Mizuho Financial Group (8411.T), Mitsubishi UFJ Financial Group (8306.T) and Sumitomo Mitsui Financial Group (8316.T) — signed on to the deal.
“The large Japanese banks are missing from this. A number of players felt it might negatively impact the ability to syndicate the debt,” said one of the sources.
Potential investors were also much more concerned about terms and conditions of lending than they would have been prior to the credit crisis, the sources added.
“The process has become a lot more cumbersome ... The kind of questions that come back from credit committees are a lot more intense,” said another of the sources.
Leverage ratios looked relatively restrained at around 5.5 times earnings. ($1=106.76 Yen) (Additional reporting by Wakako Sato of Basis Point; Editing by Ian Geoghegan)