Private equity firms doing buyouts in Australia are turning to a kind of financing used in the U.S. and Europe that gives them more flexible terms, even as it may introduce new risks for creditors.
There have been at least four deals Down Under this year where private equity firms including KKR & Co. have used so-called unitranche loans, which fuse senior and subordinated parts of traditional leveraged transactions, to finance acquisitions. Non-bank lenders typically put up the funds for unitranche debt and because there is no need to negotiate separate senior and junior facilities, deals can be done faster. There had been few such funding deals announced in Australia before 2017.
The funding structure is already popular in the U.S. and Europe, but Australia is becoming a testing ground for such transactions in the Asia-Pacific region, where deals are virtually non-existent. With banks globally facing stricter capital rules, institutional investors are playing an increasing role in providing leveraged finance to private equity firms.
“Low interest rates and global yields are prompting institutional investors to participate in loan deals in Australia,” said Simon Beissel, head of corporate and acquisition finance at Investec Australia Ltd. based in Sydney. “There is growing interest from borrowers, particularly international financial sponsors, in the unitranche structure, which can provide more gearing as well as longer tenors.”
Investors are being drawn to Australia, which has enjoyed twenty-six years without a recession. The International Monetary Fund this week forecast Australia’s economy to expand by 2.9 percent in 2018, though concerns about the nation’s growth prospects linger.
See below unitranche loans deals in 2017 for Australian M&A, according to information from people familiar with the matters, who aren’t authorized to speak publicly and asked not to be identified:
- TPG Capital Asia obtained a A$120 million ($93.4 million) six-year unitranche loan for its purchase of clinical trial operator Novotech. The financing pays a margin of about 550 basis points over the base rate
- The Carlyle Group LP and Pacific Equity Partners obtained a A$650 million six-year unitranche facility for its buyout of iNova Pharmaceuticals unit from HPS Investment Partners LLC, HSBC and Investec Bank Plc. The facility offers margins of about 535 basis points over the base rate
- Barings is supplying a unitranche loan with Nomura and Partners Group for KKR’s purchase of a majority stake in Laser Clinics Australia
Also announced this month:
- Barings provided unitranche financing for The Riverside Company’s acquisition of Australian software maker Energy Exemplar, according to law firm Hogan Lovells.
We are seeing more unitranches being done in Australia and there are more in the pipeline to come,” said John Corrin, global head of loan syndications at Australia and New Zealand Banking Group Ltd. based in Hong Kong. They will increase in size as more investors become more comfortable with that market, according to Corrin.
In traditional leveraged buyout loans, companies typically negotiate separate agreements with senior and junior lenders with senior debt being repaid first in a bankruptcy. Unitranche debt usually bears an interest rate in between the two. Because the unitranche structure blends the two classes, the lack of distinction between creditors could complicate lender recovery in a bankruptcy situation should disputes arise.
The structure saves time because unitranche deals typically are bilateral or involve fewer lenders, and aren’t syndicated like more traditional buyout loans or corporate facilities.
Private equity firms are also tapping other tools for leveraged finance Down Under with an Apollo Capital Management-invested company raising debt this year in a Term loan B. TLBs are typically targeted to institutional investors and can have covenant-lite features.
“For domestic banks, it’s not so much about the lack of capacity to provide these loans – it’s whether or not it fits their risk appetite,” said Investec’s Beissel. “Debt funds, money managers and superannuation funds are looking for the right risk-return from investing in the loan market in Australia – and term loan Bs and unitranche loans are attractive to them.”