Foreigners shake up Japanese levfin
As foreign financiers increase their involvement in leveraged finance in Japan, the market practices and terms they bring with them are shaking up the country's traditionally conservative lending landscape.
Among the foreigners making a splash are BNP Paribas and KKR Capital Markets.
The French bank is sole lender of a ¥16.17bn (US$105m) seven-year term loan to back private equity firm EQT’s planned leveraged buyout of Tokyo-listed IT company Mamezo, while KKR Capital Markets is arranging debt of an undisclosed size, together with two financial institutions, for KKR’s counterbid for cosmetics company Mandom’s management buyout.
The latter borrowing is said to carry covenants that are relatively loose by Japanese standards, similar to the structure on a ¥32.31bn loan late last year from Bank of Yokohama and KKR Capital Markets supporting KKR’s LBO of Tokyo-listed staffing agency Forum Engineering.
Japanese bankers are hopeful that loose structures won't spread widely in Japan, where leveraged financing remains the stronghold of the three mega banks – Mizuho Bank, MUFG and Sumitomo Mitsui Banking Corp – and their smaller rivals.
The moves by foreign lenders are nonetheless unsettling domestic banks.
“We feel a growing sense of alarm as new rivals enter the market and global terms are increasingly imported into Japan,” said a senior LBO banker at a Japanese bank. “Covenants are not universally required and they are fundamentally tailored on a deal-by-deal basis. However, it becomes problematic when covenants that ought to be in place are missing.”
High leverage multiples
This might seem counterintuitive given Japan is notorious for wafer-thin pricing on plain vanilla loans due to abundant liquidity among domestic lenders. Leveraged loans in the country are more borrower-friendly than in other parts of the world in at least one respect – gearing multiples.
Last year, BNPP also underwrote a ¥205bn loan backing EQT’s LBO of elevator maker Fujitec alongside four other Japanese lenders, including two mega banks. That financing carries leverage of 9.8x based on the target’s Ebitda of ¥20.88bn.
The headline leverage multiple for Mandom's MBO financing is around 11x, while that for Forum Engineering is 7x based on the respective ¥5.29bn and ¥4.61bn in Ebitda the two companies generated for the year to March 31. BNPP’s ¥16.17bn loan for Mamezo’s LBO represents a gearing of 7.5x based on Ebitda of ¥2.15bn.
Such high leverage multiples would not pass muster in other parts of Asia where LBO loans typically come with gearing of around 4.5x or lower to meet the requirements of conservative lenders in the region's bank-dominated market.
On the other hand, Japanese LBO loans carry tighter terms such as maintenance covenants that are tested regularly and require borrowers to maintain or achieve certain financial metrics.
Leveraged finance players in Japan are more conservative than their counterparts elsewhere when it comes to covenants and are reluctant to consider covenant-lite or looser structures that are common in Europe and the US.
“LBO financing in Japan has developed somewhat differently from that in Europe and the US,” said Toru Shimizu, managing director of the strategic finance department at Mizuho. “Foreign banks operate globally, so they sometimes bring overseas terms and practices into Japan. We are currently considering how to reconcile these differences.”
The dominance of banks in the leveraged finance market in Japan leaves little scope for institutional products such as term loan B and unitranche financings that have covenant-lite or looser structures.
Domestic lenders are therefore paying close attention to the BNPP and KKR Capital Markets deals.
Will cov-lite take hold?
Despite the looser covenants on the loan for Forum Engineering’s LBO, KKR Capital Markets has already sold down its ¥16.16bn position to Kiraboshi Bank and SBI Shinsei Bank. The loan is considered to be the first major instance of a private credit-connected firm playing a central role in a Japanese LBO.
“There is talk that a cov-lite environment could take hold, but the key question is who the main arrangers and final net takers are in the Japanese financing market?” said Takashi Manabe, head of sponsors finance group in SMBC’s strategic corporate banking department.
Top-tier Japanese lenders, including the mega banks, generally refrain from adopting global structures that come with looser terms. As a result, even when a foreign lender is among the mandated lead arrangers, the structures tend to have tighter covenants. In contrast, deals that do not involve mega banks tend to feature looser covenants.
The move to looser terms might accelerate if private credit develops a foothold in Japan. While international PE firms have been prolific in Japan with LBOs – some are even involved in bidding wars – opportunities for private credit financiers have been few and far between.
“[The] private debt market should be growing in an environment where it complements bank-arranged deals – either by providing quantitative support or by taking on deal types that banks find difficult to handle,” said Jin Nishikawa, head of M&A finance at MUFG. “If the trend becomes excessive, it could distort the market.”
The debt that KKR Capital Markets is providing for Mandom’s MBO will only see the light of day if KKR trumps CVC Capital Partners in the race to acquire the cosmetics company. KKR Capital Markets is expected to sell down the loan.
MUFG’s syndication strategy is not known for the ¥60bn financing it has underwritten for Mandom’s MBO. In November, the mega bank increased the underwritten loan from an original ¥53bn to back CVC’s sweetened bid for Mandom.
Spokespeople for BNPP and KKR Capital Markets had not responded to requests for comment at the time of going to press.