A slew of big-ticket leveraged buyouts in Japan are opening up opportunities for international banks unlike any they have seen in this market segment for over 15 years.
Domestic lenders have dominated activity in the country’s leveraged finance market since the global financial crisis in 2008, but foreign banks now stand a better chance to be involved as more international financial sponsors target LBOs.
The end of negative interest rates in Japan also promises better returns from these deals, although still not as good as in other Asian LBO markets.
“We are excited about the Japanese LBO market reopening to international banks,” said a Hong Kong-based banker at an international bank. “We see this as an opportunity, particularly with lacklustre M&A volumes in some other Asian markets such as China.”
Such sentiment will be put to test in the coming weeks when domestic private equity firm Japan Industrial Partners relaunches a ¥1.4trn (US$9.8bn) loan backing its LBO of Toshiba. The loan was first launched into syndication at the beginning of the year, but did not elicit much of a response, partly because of the conglomerate’s lacklustre financial results at the time.
International lenders could also join a refinancing expected for a loan of about ¥100bn that Japanese mega-banks MUFG, Mizuho and SMBC had provided to support CVC Capital Partners’ LBO of Shiseido's personal care business in 2021. Another opportunity for foreign banks is a potential dividend recapitalisation of supermarket chain Seiyu, in which KKR acquired an initial 65% stake in 2021 and the remainder in 2023.
Growing investor base
Meanwhile, Japanese banks have become more aware of concentration risks. With the yen’s depreciation and the plans of Japanese conglomerates to carve out non-core assets in recent years, deal flow has blossomed, supported by the increasing interest of global funds in Japanese LBOs, and domestic banks have been looking to expand the investor base as a result.
The three mega-banks started inviting internationals in syndication about a year ago, according to a source, and the latter, mainly Asian banks, have selectively joined in syndications of Japanese LBO loans.
A couple of LBOs have already drawn foreign capital this year. A jumbo five-year loan of about ¥300bn backing US private equity firm Apollo Global Management’s LBO of Panasonic Automotive Systems closed the first round of syndication recently, attracting nine international banks. Swedish investment fund EQT’s ¥230bn seven-year loan backing its management buyout of education company Benesse Holdings also closed recently, attracting four Asian banks.
“This is a symbolic deal in which so many international lenders joined in syndication,” a leveraged finance banker at a Japanese bank said about the Panasonic Automotive borrowing. “The leverage is low, pricing is attractive and the business is simple to evaluate, which makes it easier for international banks to join.”
ANZ, CTBC Bank, E.Sun Commercial Bank, Industrial Bank of Korea, KEB Hana Bank, Kookmin Bank, Korea Development Bank, Shinhan Bank Japan and State Bank of India are providing about a third of the overall financing for Panasonic Automotive. PAS sells infotainment systems and other electronics to carmakers globally.
Aozora Bank, Bank of Yokohama and SMBC were the mandated lead arrangers, bookrunners and underwriters of the loan, which pays interest margins of 300bp–325bp over Tibor. SMBC took the largest commitment of ¥92bn, while the other two took ¥20bn each.
Seven Japanese banks also joined in the first round of syndication: Development Bank of Japan, Norinchukin Bank, Resona Bank, SBI Shinsei Bank, Sumitomo Mitsui Trust Bank, Suruga Bank and Tokyo Star Bank.
Further syndication may be expected before the targeted closing by the end of this year.
The pricing is in line with that of recent jumbo LBO deals in Japan, which has improved from the 200bp levels transacted a few years ago, according to bankers. The leverage was conservative and represented a 3 times multiple of the Ebitda of ¥101.5bn PAS registered for the fiscal year ended in March this year.
Leverage multiples tend to be higher and tenors are usually longer at seven years in Japan compared with the rest of the region. However, some deals are structured closer to the global standards, according to bankers.
“We have seen pricing of Japanese deals improve in recent years, bringing their economics to comparable levels to the rest of our LBO lending book,” said the Hong Kong-based banker.
Japan's LBO loan volume has reached US$1.596bn so far this year, already surpassing last year's volume of US$1.188bn, according to LPC data, with pipeline deals worth US$16.185bn.
The overall volume in Asia-Pacific stands at US$6.612bn compared with US$9.971bn last year.
No underwriting yet
International banks are expected to remain more focused on participation rather than underwriting at this stage, as they no longer have dedicated teams in Tokyo for LBOs since the global financial crisis. However, some are believed to be seeking new hires.
“In addition to participation opportunities, we also intend to look for underwriting opportunities over time,” the Hong Kong-based banker said.
Japanese banks are also keen on the idea of sharing risks and gaining expertise from international banks.
“We would like to have international banks as underwriters as well as long as they can also hold a portion or bring in lenders we cannot reach out to,” said an LBO banker at another Japanese bank.