South Korea loan

IFR Asia Awards 2014
3 min read
Asia
Prakash Chakravarti

When US-based Tyco started the sales process for security services provider ADT Korea in November 2013, few could have predicted that the financing would play such an important part in determining the outcome.

Carlyle Group emerged victorious months later due to a gutsy, underwritten W1.35bn (US$1.21bn) leveraged buyout financing that included the largest mezzanine loan on record in Asia, excluding Japan.

With a price tag of around US$1.93bn, the acquisition was Korea’s largest LBO and the largest M&A transaction in Asia’s security service industry. It was also Carlyle’s first significant buyout in the country.

None of that would have been possible without the conviction of UBS, which put its balance sheet on the line as the sole underwriter of a W360bn mezzanine loan. Along with a senior loan of W985bn, the combined buyout financing helped Carlyle to comfortably outbid its rivals.

The opening leverage of around 7.5x earnings, which consisted of around 5.5x in senior debt leverage and nearly 2x in junior debt, gave Carlyle’s bid terms that competitors could not match. Other financial sponsors were bidding for ADT, but, with debt for only around 6.0x–6.2x, they were unable to match Carlyle’s offer.

Mezzanine debt is rare in Asia’s bank-dominated loan market, and UBS made a bold call that it would be able to sell down the position. There was only one precedent in Korea – the W1.14trn LBO financing backing the acquisition of Oriental Brewery in June 2009. The 61-month mezzanine tranche carried interest of 9.5%, split between a 2% coupon and 7.5% was payment in kind (PIK), a feature that was also last seen in Asia on Oriental Brewery’s LBO.

The senior debt was equally eye-catching. The portion comprised a W940bn five-year term loan and a W45bn five-year revolver, both of which, like the mezzanine tranche, had bullet maturities – also unique for an Asian LBO loan.

Carlyle negotiated the senior and junior tranches separately, before lenders thrashed out a complex inter-creditor agreement. The private-equity firm also insisted on full documentation within an unprecedented timeframe of two weeks, allowing it to show Tyco that it was serious about its offer.

The senior and junior debts received good responses from the market. UBS sold the mezzanine tranche to seven other institutional investors, including a European debt specialist fund.

One of the non-bank financial institutions also participated in the senior debt, along with 15 other lenders. Korea Exchange Bank initially underwrote the senior portion, and Industrial Bank of Korea, Kookmin Bank and Korea Investment & Securities joined as mandated lead arrangers and bookrunners.