Tata Steel’s acquisition of European steel maker Corus was a defining moment for the Asian syndicated loan market. The massive US$13bn term loan proved that Asian borrowers could access enormous amounts of money without the US market, raising the bar for outbound M&A. But it wasn’t supposed to be that way.
When Tata Steel began pursuing Corus in late 2006, ABN AMRO, Credit Suisse and Deutsche Bank put together a leveraged financing that was to be split between senior debt and a subordinated, high-yield piece destined for the bond market. A dozen lenders were quickly attached to the US$1.8bn bridge loan.
A bidding war against Brazil’s CSN then drove the purchase price up as much as 33% to about US$12bn, pushing the Tatas to add a second bridge loan and rethink the long-term financing plan for its new asset.
Citigroup entered the scene with a far cheaper £3.67bn non-recourse loan, to be split between a term loan A targeted at banks and a term loan B sold in the US institutional market. ABN and Standard Chartered signed on quickly, and Deutsche eventually rejoined as a top-line arranger, but Credit Suisse left in a huff, complaining that the new financing was too aggressive to clear the market.
The Swiss bank was almost proved right, when the £1.5bn term loan B flopped in a US market reeling from the collapse of two Bear Stearns hedge funds in July 2007.
“The day we launched the US roadshow was literally the day the subprime crisis hit,” said Farhan Faruqui, then Citigroup’s head of global loans for Asia. “Investors were pulling out so fast we were worried the room was going to be empty.”
Cue a hasty restructuring. Citigroup repackaged the term loan B into three separate tranches that better suited bank lenders and launched the entire £3.67bn financing to the bank market in August. It was a risky move: Asian lenders had never seen a leveraged buyout of that size, many were already heavily exposed to the Tata group, and the subprime crisis was spreading to Europe’s leveraged finance market through its many structured investment vehicles. But the tactic paid off. By December, four dozen institutions – mostly banks – had joined the financing, underlining the Asian loan market’s ability to support massive outbound acquisitions years before China’s M&A spree would take off.
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