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Nasdaq-listed Focus Media Holding’s US$1.725bn LBO financing overcame several hurdles to play a crucial role in ensuring the completion of the company’s US$3.7bn buyout – the largest ever involving a Chinese target – and successfully pass a vital test for the country’s leveraged finance market.
The biggest challenge faced by the buyout stemmed from two factors: allegations from short-seller Muddy Waters in November 2011 that Focus Media overstated assets and paid too much for acquisitions, and an investigation by the US SEC into possible securities violations by the Chinese display advertising firm.
The buyout financing is the largest ever for a Chinese company, and the loan market debutant lacked name recognition among foreign lenders, as well as hard assets in its underlying business, adding to the deal’s complexity.
Given those issues, prospective lenders had to approach not only their risk committees to get credit approval but also their respective boards to take into account reputational risk.
“The deal was severely complex and had significant challenges in that it featured a debut borrower with an asset-light business, an offshore holdco structure for a Chinese credit, regulatory challenges – and still achieved a great outcome in syndication,” said Benjamin Ng, head of debt syndicate, loans and acquisition finance at Citigroup.
Another concern was the presence of multiple sponsors in the buyout consortium, which was borne out by the withdrawal of CDH Investments from the sponsor group at the last minute. This forced lenders to rework documentation and re-apply for credit approvals.
Despite the challenges, the original arranger group comprising Citigroup, Credit Suisse and DBS Bank expanded to nine after a strong response from lenders at the underwriting stage.
The strong reaction also prompted a change in the financing structure, as a US$200m–$300m bridge-to-bond was replaced by a US$200m standby letter of credit facility provided by DBS. The SBLC and a US$450m 12-month bridge-to-cash were not syndicated, leaving only a US$1.075bn five-year term loan to sell down.
Excluding the US$450m bridge-to-cash, the net opening leverage amounted to 1.95 times, which combined with the fact that the entire LBO debt represented less than half of the total US$3.7bn funding required for the buyout, made the debt structure conservative.
The deal launched into senior syndication in January 2013 and the momentum that had built up during the underwriting stage continued, with nine more lenders joining the by the end of March.
Pricing was structured to make the deal as attractive as possible to lenders, with the top-level all-in at 611.45bp based on an initial margin of 525bp over Libor and an average life of 3.47 years.
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