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This article is provided to FT.com readers by Debtwire—the most informed news service available for financial professionals in fixed income markets across the world. www.debtwire.com
When Affinity Equity Partners and Kohlberg Kravis Roberts bought Oriental Brewery for USD 1.8bn in May 2009, the cost of debt financing was so high they asked the seller, Anheuser Busch InBev, to fund part of the buyout. What a difference a year makes, Debtwire reports.
Despite the shockwaves gripping Europe, lenders in Asia are flush with cash and the two sponsors have received numerous offers to refinance the USD 825m LBO loans they did borrow for the purchase just nine months ago. Both Korean banks and foreign institution lined up in recent months to court the sponsors for a recapitalization of the number-two South Korean brewer, said three sources close to the situation.
Liquidity is returning to the Korean banking system in a big way this year and that has boosted Korean banks lending and underwriting capability, two sources at Korean banks said. That jibes with the Bank of Korea’s decision to raise its 2010 GDP growth forecast to 5.2% from 4.6%, a significant jump from a 1.8% growth rate in 1Q10 and 0.2% in 4Q09.
Each major Korean bank is capable of underwriting KRW 300bn (USD 270m) per transaction – twice the amount they could underwrite at the height of the financial crisis, one of the two sources said.
Affinity and KKR could use that liquidity to recoup some of their collective USD 675m equity investment in Oriental on top of refinancing the company’s loans. But now that the shoe is on the other foot, the sponsors would only consider a transaction that actually reduces debt by lowering its interest expense, said one of the sources close.
In their eagerness to land a mandate, some Korean banks offered to shave margins on Oriental Brewery’s debt by 200bps across the board, said a second Korean banker with knowledge of the proposals.
Oriental’s USD 825m senior loan maturing in 2014 pays an initial interest margin of LIBOR +600bps and steps down as the company meets de-leveraging milestones. Anheuser Busch Inbev’s USD 300m vendor note pays an initial margin of L + 800bps and steps down to L + 700bps from July this year.
Korean banks would be willing to fund a deal with leverage of up to 5x EBITDA, compared to 4x when the original financing closed, said the second Korean banker with knowledge of the proposals. The brewer will likely generate KRW 300bn (USD 268.5m) of EBITDA this year compared to KRW 255bn at the time of the buyout, said the source.
Assuming lenders sign up for a 5x levered deal and the sponsors use it to refinance both outstanding LBO debt and the vendor note, that would leave roughly USD 218m for a theoretical dividend payment. The sum far exceeds what any interest-rate reductions could compensate for.
Given that almost all of Oriental Brewery’s revenues are KRW-denominated, the Korean banks’ willingness to refinance the LBO loan facility entirely in won should be especially attractive to the company’s sponsors, said the Korean bankers. The USD 825m-equivalent LBO facility is currently split into a USD 475m tranche and a KRW 450bn tranche.
KKR bought Oriental Brewery with a USD 1.8bn bid in May last year, beating Affinity and MBK Partners for the asset. KKR later sold 50% of the asset to Affinity.
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