By Cynthia Koons
One thing stands out in Asia's uninspiring deal landscape this
year: big loans.
Acquisition financing in Asia, excluding Japan, has hit its
highest year-to-date level since 2007, up 46% from the same period
last year, according to Dealogic. That is despite acquisitions
rising only 3% this year after a slowdown in recent months.
Now as investors pull cash out of Asia in the belief that the
U.S. Federal Reserve will soon start winding down its monetary
stimulus, some people are saying this wave of debt-fueled deals
could soon end.
"I don't think I would stand and wave my hand at this point in
time and say, 'This is the new normal'," said Keith Pogson, a
partner in Ernst & Young's Asian-Pacific financial-services
office.
He said this year's leveraged deals were successful because of
low interest rates and good acquisition targets. "There's not going
to be an unending appetite for buyers, sellers and funders for
these deals," Mr. Pogson said. "There's a window. I don't know how
long this window is going to be."
Bankers say they don't expect such lending to end quickly, but
banks might soon begin offering less leverage on deals, which would
slow already lackluster deal making.
"What you are seeing now is what I think is the back end of what
you could call a self-contained bubble within the Asian bank and
bond markets," said Lyndon Hsu, head of leverage and acquisition
finance for HSBC Holdings PLC in the Asian-Pacific region. He said
he expects the market to cool over the next six months, following a
tightening in lending markets in the U.S. and Europe.
A few large deals have accounted for the bulk of the lending
this year, which has totaled more than $20 billion. Thai tycoon
Dhanin Chearavanont's CP All PCL (CPALL.TH) took out a $6 billion
loan to buy Siam Makro PCL, a local discount-store chain, in April
in a deal funded almost entirely by debt. Chinese energy giant
Cnooc Ltd. (0883.HK) got a loan of similar size to help fund its
$15.1 billion purchase of Canada's Nexen Inc. (005720.SE), one of
the country's largest energy producers, in a deal that closed in
February. In both deals, a large number of banks were eager to
offer loans.
Dealogic's data don't include some of the biggest loans made
this year, either because of the way the deals were structured or
because they haven't closed yet.
Shuanghui International Holdings Ltd., for example, borrowed
around $7.9 billion to fund its $4.7 billion bid for U.S. pork
producer Smithfield Foods Inc. (SFD), with Morgan Stanley and Bank
of China Ltd. splitting the lending. When Mr. Dhanin's CP Group
needed to fund a $9.4 billion purchase of HSBC's stake in Chinese
insurer Ping An Insurance (Group) Co. of China Ltd. (000001.SZ),
UBS stepped in with a loan to support the bulk of the purchase.
The surge in big loans has been driven by banks' need to
generate returns at a time when they are sitting on lots of cash
but facing weak markets for deals, IPOs and trading. "Bankers and
organizations still need to pay salaries and hence there's more
interest in doing leverage than we've seen in a long time," Mr.
Pogson said.
Banks' willingness to take out their checkbooks to please big
clients carries risks, especially if the targets of deals don't
live up to expectations.
"I think the banks are being more aggressive--it's a risk, yes,"
said Eka Nirapathpongporn, a managing director at Lazard in Hong
Kong. "But these guys are banking on the relationship with all
these growing families. I think they're banking on the fact that
these family businesses and empires are going to continue to get
stronger."
A Morgan Stanley spokeswoman said the bank doesn't comment on
specific deals. UBS declined to comment.
There are reasons to believe that the family empires will
continue to grow. The Association of Southeast Asian Nations, or
Asean, aims to create a regional free-trade bloc by 2015, which
should allow freer movement of labor, goods and services. That
should create bigger markets for conglomerates that are bulking up
across the region, which is home to around 600 million people.
Family-controlled Thai companies have led the way this year,
completing $19.8 billion in overseas acquisitions, more than triple
the amount during the same period a year ago, according to
Dealogic.
In addition to Mr. Dhanin's investments in Ping An and Siam
Makro, Thai tycoon Charoen Sirivadhanabhakdi's Thai Beverage PCL
(Y92.SG) succeeded with an $11.2 billion bid for Singaporean
conglomerate Fraser & Neave Ltd. (F99.SG), funded by a $9.2
billion jumbo loan from DBS Group Holdings Ltd. and UOB.
Write to Cynthia Koons at cynthia.koons@wsj.com
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