SA Manages To Escape A Looming Wall Of Debt
Between 2005 and July 2008, when the world was flooded with liquidity, cheap bank leverage and active yield bond markets, SA banks were generous – less so than their First-World counterparts – and private equity (PE) buyouts relied on debt more.
Pre-2009 the euro high-yield bond market provided lower interest rates than were available in SA, says Bill Ashmore, a partner at Ethos Private Equity. Also, the “covenant lite” nature of the bond made this an attractive option for SA borrowings in excess of R1bn.
In mid-2008, when financial markets crashed, the world of excessive debt came to an end. High-yield bond markets closed, mezzanine funding dried up and global banks stopped lending. When global bank lending restarted in early 2011 it was cautious, with global banks facing a wall of maturities from 2012 onwards. Their focus since then has been to restructure these loans and the bank loan maturity wall in Europe has shifted to 2015-2016.
In the face of the debt crisis SA’s PE market slowed down with the major negative being a price mismatch between buyers and sellers in the acquisition marketplace. Local banks reduced their debt appetite to a 2-2,5 times Ebitda and debt was no longer a significant enabler when sellers were requiring in excess of 10 times Ebitda to sell good businesses.
Fortunately, SA will escape a wall of maturities. There are several reasons for this. “Exchange control was a factor,” says Ashmore. Another was that most companies were able to obtain financing locally rather than through the European bond market, as debt packages under R1bn were too small to access this market.
Specifically, SA PE funds were more conservative than their global counterparts when it came to debt structuring pre-2009. Debt in SA PE deals rarely constituted more than 60% of the deal enterprise value. The debt component of PE deals in Europe at that time regularly exceeded 70%.
SA banks were also more cautious. Says Nedbank Capital head of leveraged finance Johann van Zyl: “If we put a higher than normal rate of debt into a deal, we put strict limitations in place.” However, in 2007 and 2008 as competition for deals heated up, PE houses found themselves bidding higher to secure the deal. “This pushed debt levels up in many deals.”
In markets outside SA, nonbank investors in debt, like hedge funds, played a bigger role. SA banks were better capitalised, putting them on a better footing when it came to managing poorly performing loans.
Edcon’s R25bn PE deal, the biggest in SA’s history, has been the subject of constant speculation. Though it bought back some of its European debt, following the subprime crisis, the company will have to retire R11bn of debt by 2014. A Macquarie First South Securities Research report suggests an IPO is the only alternative.
Today six banks in SA are competing aggressively for PE debt in the R0,5bn – R3bn range. The market’s view is that debt packages of up to R5bn can be comfortably underwritten by a club of three or four banks for tenures of six to seven years.