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Deal of the Year/Best Syndicated Loan

Pacific Century Cyberworks, $12 billion syndicated loan

Bank of China International Capital, Barclays Capital, BNP Paribas, HSBC

There could be no other candidate to win loan of the year, or indeed deal of the year, since Asia has never seen a transaction such as this one before. At more than twice the size of the previous record holder, the $12 billion facility changed the face of Asia's syndicated loan market forever and opened the door for leveraged financing across the broader spectrum of the region's capital markets. That the company behind it was only 10 months old – an internet start-up, with absolutely no credit history, little cash flow and its initial growth fuelled almost entirely by a stock market frenzy in tech stocks – was even more astounding.

A confluence of history, opportunistic thinking and the extensive patronage commanded by Hong Kong tycoon Li Ka-Shing and his family lay behind the transaction's ultimate success. For the Asian syndicated loan markets, the deal proved to be an easy test of its ability to absorb funding in size.

Long considered the poor relation of the international bond market, in this instance the sector showed corporate Asia how it might be able to raise a very large sum of money at very short notice. At the heart of the deal was the desire of PCCW head Richard Li to acquire Hong Kong Telecom (HKT) from its UK parent Cable &Wireless. Intending to offer shareholders either an all share alternative, or a combination of cash and shares, $12 billion was needed to fund the possible cash element of the offer.

For the four coordinating arrangers that had to irrevocably commit $12 billion up-front under Hong Kong's takeover code, it was a matter of mitigating the risk of lending to PCCW. Cleverly the four decided to structure a deal as a leveraged financing secured against the assets of the target company HKT. As a result, a non-recourse structure through an SPV owning the HKT shares was embraced.

Hostile acquisition financings generally require generous margins, rich fees, short-term maturities and clearly defined take-out strategies, so that the net effect on banks' loan portfolios is not overly severe. In PCCW's case, headline pricing appeared generous in a regional context but less so in an international context given recent precedents. So too, where it had become rare for a European deal to have a debt/Ebitda ratio of more than 5.5 times, PCCW's loan carried a ratio of nine times based on HKT's Ebitda of $1 billion.

Yet, aggressive pricing and extension clauses enabling PCCW to term out the debt if necessary, failed to act as a deterrent during syndication. Some 30 banks were invited and contrary to most loan syndications where up to half might decline, 27 accepted. Extension clauses also proved unnecessary. Despite a severe contraction in its stock price, PCCW is at year-end, calling on its many relationships again and raising $4.7 billion to cover the remaining $4.08 billion that is left to re-finance of the original loan. It was a remarkable deal done by a remarkable company. Without it PCCW's purchase of C&W HKT could never have taken place.

 

Most Innovative Deal

Carlyle's acquisition of 40.5% of Koram Bank

  • Salomon Smith Barney - Adviser to Carlyle 
  • Goldman Sachs - Adviser to Koram Bank

Innovation grows out of adversity. In Carlyle's case there was quite a lot of adversity. This was a deal that almost died on six occasions and faced enormous opposition from the Korean authorities.

Carlyle's acquisition of a 40.5% stake in Koram Bank was a saga to say the least. The process lasted almost a year and would have seen many lesser men than Michael Kim - Carlyle's Asian boss - throw in the towel. The core problem faced by Carlyle was a Korean regulation that said only another bank could buy more than 4% of a healthy Korean bank. Obviously, Carlyle is a fund and not a bank.

Kim's eventual solution was to bring JP Morgan's bank fund Corsair into the deal as a partner, and persuade the authorities that Corsair was a financial institution because it was 100% owned by JP Morgan. However, Corsair didn't want to buy as big a chunk of Koram as Carlyle did. Indeed, Carlyle wanted to gain control.

That raised a structuring problem. In an ideal world the Korean authorities wanted this to be a transaction where 51% was owned by JP Morgan and 49% by Carlyle. Yet, neither Carlyle nor JP Morgan wanted this. That is because Carlyle sourced the deal and wanted control; and JP Morgan did not want to own more than half because that would have triggered problems of its own. As the owner of the bank, its holding company might have to bailout the bank should there be trouble in the future. From JP Morgan's point of view this was strictly a financial investment and not a strategic one.

The answer was a cleverly devised structure. This saw Carlyle and Corsair create a main investment vehicle that was 50% owned by each and which invested $200 million in the deal. The remaining $250 million was injected via a series of trusts.

These trusts included Carlyle monies as well as monies raised from other investors. Carlyle retains voting control of the trusts. This clever structure was the only way to get round the so-called 4% rule.

The deal was a landmark in many respects. It is Carlyle's biggest ever and is the biggest deal to be done in Korea by a foreign acquiror in 2000. It is also unusual by Korean standards in that the buyer gained control – getting seven out of 13 board seats.

 

Best Asset-Backed Deal

Korea Asset Funding 2000–2001 Ltd., $367 million secured FRN

Deutsche Bank, UBS Warburg

No transaction better exemplifies a country's attempts to sort out its non-performing loan (NPL) problem than the Korea Asset Management Company's (Kamco) international asset-backed deal. Structured as a true sale collateralized loan obligation (CLO), the issue ranks as Asia's first cross-border NPL securitization, Korea's largest international securitization and the region's second largest such deal ever. Kamco hopes that the benchmark transaction will not be its last and believes too that it has set a template for others in the Korean Republic to follow.

For the borrower, the transaction was said to provide a convenient, cost-effective means of financing over 87% of its dollar and yen portfolio, as well as opening a new source of available capital for future funding requirements. And it was able to do so because underpinning the whole deal is the creditworthiness of the Korea Development Bank (KDB).

In essence, the transaction comprised a portfolio of 135 restructured corporate loans purchased by Kamco from six local banks including KDB, which contributed 60% of the total. In addition, the government-owned bank provided a facility for credit support and liquidity coverage, representing 30% of the original principal amount.

Such strong backing enabled the deal to achieve a coveted investment grade rating at Korea's sovereign ceiling and provided its key selling point. In the same way that Hanvit Bank's bond deal had been sold as a high yield sovereign play earlier in the year, Deutsche and UBSW followed suit with Kamco.

It was to prove a successful strategy, with books closing over four times oversubscribed. For investors a 200bp spread over Libor represented an attractive proposition compared to then trading levels of outstanding KDB debt, which stood at about 90bp over a like-for-like basis. An additional structural innovation that made the deal unique was its series of put options that reverted back to the originating banks in the event of a loan default. This meant that whereas with a typical CLO structure, a default on the underlying portfolio extends bond maturity, in this case it would shorten it because investors would be re-paid early.

The leads were also proud of the fact that the deal incorporates Asia's first controlled pass-through structure. This meant that in the event of excess cash flow being generated by the underlying assets, principal amortizes to the benefit of both the borrower and investors. The borrower sees overall costs reduced, while investors see their pay-down schedule secured.

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