KKR wins Oriental prize

Asia has long been the backwater of the leveraged buyout world, but a leveraged loan backing the private equity acquisition of South Korea’s Oriental Brewery looks set to thrust the region into the global spotlight. Moreover, in a year that has seen only minimal activity in the mature markets of the US and Europe, the loan backing the buyout will be the largest seen so far this year globally.

Vendor Anheuser-Busch InBev has selected KKR as a preferred bidder for the assets, although there is still a slim chance that an improved rival offer could still emerge.

Supporting KKR’s bid for what is one of South Korea’s largest beer makers is a US$760m-equivalent five-year senior debt facility provided through a group of international lenders. The funding is surprisingly punchy, hearkening back to an era of jumbo bull-market LBOs that were ventured (and then largely aborted) in Asia prior to the credit crunch.

So far the deal has generated a huge level of interest from the financing community, which is a testimony to the quality of the underlying borrower and the confidence that some banks now have to deploy new capital into well-structured and priced assets.

Four lenders – JP Morgan, HSBC, Nomura and Standard Chartered – have each underwritten US$150m for the KKR financing. Three of these lenders intend to sell down their underwritten commitments to US$75m each, while a fourth is eyeing a US$100m final hold. In addition, three others – Calyon, ING and Natixis – have committed the balance on a take-and-hold basis.

KKR’s financing package looks as if it will tick the right boxes for lenders. Leverage is conservative, while pricing is modestly generous when compared with recent US transactions.

The loan, which is as yet unrated but is expected to emerge in the BB segment, is understood to pay an all-in close to 600bp based on an average life of 3-1/2 years. The LBO features a 50% balloon repayment at maturity.

The margin on the loan drops by some 100bp as quickly as six months after the drawdown. This is because offshore lenders will initially face a greater risk as they will be lending to a holdco that will own Oriental Brewery and will not have direct access to the target’s cashflow or assets. After that period, the holdco will be merged with the target as is typical in a classic LBO scenario, and the margin will drop accordingly.

Pricing compares well with recent leveraged transactions in the US. For example a US$250m five-year Term Loan B for Michael Foods in the US, rated Ba3/BB by Moody’s and S&P, closed in April. The deal, priced at 96, pays a coupon of 450bp over Libor and features a Libor floor of 2%.

Junior interest

In addition to the senior debt, a handful of mezzanine funds – some linked to domestic South Korean lenders – are also circling the deal. Typically Asian LBOs have relied largely on the bank buyers and have rarely turned to the institutional market.

The last time institutional investors were seen in an Asian regional facility was during the boom times of 2006 and early 2007 when the LBOs for Seven Media and PBL Media, two Australian targets, featured institutional investors in both the senior and sub-debt tranches.

Oriental Brewery is estimated to have an Ebitda of W247bn–W267bn (US$185m–$200m), which means the present financing of US$760m represents a leverage of 3.8–4 times. Mezz fund participation would create a sub-debt tranche that could increase total leverage to 4-1/2 times.

KKR is rumoured to have put in a bid of US$1.9bn-equivalent or an Ebitda multiple of about 10 times, which means it is also writing a substantial equity cheque.

A tranche of sub-debt could cut KKR’s equity contribution, increasing leverage, which might make lenders uncomfortable. However, there is a building view that KKR has scope to push its leverage levels given the availability of Won liquidity for the acquisition from South Korean lenders.

South Korean lenders who are backing rival bidders Affinity Equity Partners and MBK Partners would probably switch allegiances to KKR if it became clear the US firm was the definitive winner. Korea Exchange Bank, National Agricultural Cooperative Federation and Woori Bank have, along with Citigroup, Natixis and Standard Chartered, backed Affinity. MBK’s bid was supported by Hana Daetoo Investment Bank and Korea Development Bank.

Closing time

Even with the financing in place, the final outcome of the acquisition was still fluid late last week with the signing of the sale and purchase agreement expected imminently. KKR’s formidable line-up of financiers may have provided an edge in negotiations, but observers still believe Oriental Brewery remains up for grabs until the actual agreement is signed.

Bankers at domestic lenders backing Affinity and MBK did not to rule out the possibility of an 11th-hour push by either of the rival bidders to dislodge KKR, especially if they can offer a better price. This is certainly possible since Affinity and MBK’s bids were not far behind KKR’s.

That said, others argued that InBev was unlikely to extend the process given that the sale has already seen two rounds of bidding.

Regardless of which bidder ultimately prevails, lenders will want to finance the buyout as it presents a rare opportunity to lend to a quality credit through an LBO.

Globally, the loan will be one of the few opportunities that international banks will have this year to lend to a leveraged credit. In Europe, for example, the markets remain largely moribund with a staple financing for the sale of Essent Milieu, the Dutch waste group, the only deal of any real note so far seen.