Aussie lev fin points to revival

* Loans: Riskier loans test resilience of institutional market By Mariko Ishikawa SYDNEY, May 29 (LPC) - The leveraged finance market Down Under is showing signs of revival, with a couple of event-driven loans injecting life into a market that slowed to a trickle when the coronavirus pandemic hit. Infrastructure services company Ventia and private equity firm Madison Dearborn Partners are leading a US$3.81bn-equivalent pipeline of sizeable term loan Bs, in a test of resilience for institutional loans in Australasia. Ventia is eyeing a A$525m-equivalent (US$340m) dual-currency add-on TLB to fund its acquisition of Broadspectrum, the Australian services unit of Spain's Ferrovial. Madison Dearborn is in the market for a A$725m TLB backing its buyout of a stake in disability employment services provider Advanced Personnel Management. “The outlook for the Australasian leveraged loan markets looks cautiously optimistic, taking its lead from the US high-yield bond and TLB markets, which continue to see new issuance accelerate despite the toll Covid-19 is having on the country,” said Peter Graf, Credit Suisse's head of leveraged finance for Australia. Other Australasian borrowers tapping the TLB markets include gaming machine manufacturer Aristocrat Leisure, data centre company AirTrunk and mental health, rehabilitation, oncology and cardiology services provider Healthe Care Specialty. MIXED RESULTS While bankers and loan investors welcome the return of TLBs, there is caution over the fallout from Covid-19 and how deals should be structured and priced. “There are likely to be bumps in the road as more new issuance tests the boundaries on what is executable in the post Covid-19 world,” said Graf. “Phrases like ‘essential services, ‘Ebitdac’ (Ebitda adjusted for Covid-19 impact) and ‘Covid-safe’ are the new buzzwords for credit markets in 2020.” TLB borrowers have had mixed results in recent weeks. Earlier in May, Aristocrat Leisure, a frequent borrower, won a vote of confidence from US investors as it increased and tightened terms on a US$500m incremental TLB. The covenant-lite deal had been marketed at 400bp over Libor and a 97 original issue discount, but the terms were revised tighter to 375bp over Libor and 98 OID. Pricing is still juicier than the 175bp margin offered on loans of US$1.3bn and US$950m that priced in May 2018. In April, AirTrunk flexed pricing on a multi-currency TLB of around A$1.6bn by 75bp to 450bp over BBSY/SOR/Hibor. The loan has an average life of 4.75 years and has still not closed after having been initially launched in mid-February. In early March, before the coronavirus outbreak triggered a lockdown in Australia, cancer and cardiac service provider GenesisCare sweetened pricing on the euro tranche of a US$1.002bn-equivalent TLB backing its acquisition of US-based 21st Century Oncology. Ventia, which maintains and manages public and private infrastructure assets in Australia and New Zealand, is offering margins of 450bp–475bp over Libor for US dollars and 550bp–575bp over BBSY for Australian dollars – up around 100bp from its June 2019 financing. (See Table.) “The balance of power has shifted in favour of the lenders, in contrast to the borrowers’ market that we have seen over the last few years,” said Alok Jhingan, head of acquisition and syndicated finance for Australia and New Zealand at Citigroup. Most of the TLBs for Australasian borrowers include tranches in US dollars, euros or pounds sterling, given that the Australian dollar market for this product is still small. Nonetheless, the local market has grown rapidly since the first Aussie dollar TLB in May 2015 – a A$359m tranche of a A$900m borrowing for LS Newco (now Ventia). It has also emerged as a viable alternative to the offshore TLB and bank liquidity in Australia. “Aussie dollar tranches in TLBs are thinly traded and tend to be smaller in size and illiquid versus other currencies,” said Jhingan. “Investors are going to continue to demand a premium on Aussie dollar tranches versus the offshore tranches. The difference in spreads may increase to reflect the rise in swap costs post Covid-19.” PIPELINE BUILDS Successful outcomes for the loans for Ventia and Madison Dearborn could set the stage for other financings. While several asset sales and carve-outs were put on hold or cancelled due to the pandemic, cashed-up sponsors are looking for bargains. Funds under management with Australian PEs and venture capital firms rose to a new high of A$33bn in June 2019, according to Preqin & Australian Investment Council. “There is still a lot of dry powder sitting at private equity firms,” said Bob Sahota, chief investment officer at Revolution Asset Management, which invests in leveraged loans in Australia and New Zealand. “It’s the case of how to get deals funded when there may not be many banks willing to underwrite loans.” Melbourne-based Village Roadshow granted PE firm BGH Capital exclusive access to its books this month, even after the suitor cut its bid by 40% and made it conditional on Village reopening its theme parks and cinemas. Commonwealth Bank of Australia agreed to sell its 55% stake in Colonial First State, while binding bids for embattled airline Virgin Holding Australia are due on June 12. Financial services company Pioneer Credit is discussing alternative proposals after Carlyle Group terminated its buyout in April. Term Loan Bs for Australasian borrowers Borrower Tenor Margin Date of Tenor Margin (years) (bp) previous (years) (bp) financings Ventia/Broadsp 6 450-474, June 2019 ~7 350, ectrum 550-575 462.5 (A$) (A$) Madison 6 (1L) 550 (1L) Dearborn/APM Madison 7 (2L) 950 (2L) Dearborn/APM Aristocrat ~4.5 375 May 2018 ~6.5 175 Leisure AirTrunk 5 450 April 2019 5 (1L), 275 5.5 (1L), (2L) 800 (2L) Healthe Care 5 (1L) 475 (1L) Specialty Healthe Care 5.5 800 (2L) Specialty GenesisCare/21 7 500, 475 August st Century (€), 525 2018 Oncology (A$) TradeMe 6.25 400 April 2019 7 (1L) 425 Source: Refinitiv LPC (Reporting By Mariko Ishikawa; editing by Prakash Chakravarti and Chris Mangham)