HKEx to spice up loan market

* Loans: Banks eye potential financing for HK bourse’s high-profile LSE bid

By Prakash Chakravarti, Tessa Walsh and Apple Lam

HONG KONG/ LONDON, Sept 13 (LPC) - Asian and global banks are eyeing a role on a potential multi-billion dollar debt financing to support Hong Kong Exchanges and Clearing’s £31.6bn (US$39bn) takeover bid for the London Stock Exchange.

The strong interest in the deal contrasts with the negative reaction from equity investors after Wednesday's announcement caught market participants by surprise. HKEx slid 3.3% on Thursday as investors gave the takeover proposal a cool response.

HKEx has tabled a conditional offer of about £83.61 per LSE share through a combination of cash and stock. It has not specified the size and tenor of any financing, or named any banks providing debt. Moelis is advising HKEx on the bid, which has an initial deadline of October 9. The Hong Kong bourse must have a committed financing in place by that date, under UK takeover regulations.

Several bankers pointed to HSBC as the likely financing bank, given its close relationship with HKEx and its involvement in the Hong Kong bourse’s previous acquisition financing.

In June 2012, HKEx raised a £543m (US$843m then) one-year bridge loan via Deutsche Bank, HSBC and UBS to fund its £1.4bn purchase of the London Metals Exchange. That loan was priced at 65bp over Libor with a step-up to 85bp. China Development Bank also provided a US$1.8bn three-year bilateral loan.

There is a high likelihood of other heavyweight banks being involved this time given the large size of the borrowing. Some estimated HKEx will borrow up to £5bn, which represents a multiple of around 2.2x the combined Ebitda of £2.26bn the Hong Kong stock exchange and LSE generated in 2018.

GEARING RATIO

Fitch estimated that HKEx could need to borrow up to around £6.5bn to fund the £7.3bn cash component, depending on unrestricted cash available at the time of closing. That would push its gross debt to Ebitda to 4x and pro forma gearing ratio to above 50%, according to the rating agency.

HKEx has a publicly stated strategy to maintain its gross gearing ratio (gross debt/adjusted capital) at less than 50%.

The Hong Kong exchange operator was quick to bring its gearing down after its purchase of LME. In September 2012, only a few months after it closed the acquisition loans, HKEx completed a US$500m convertible bond, again through Deutsche, HSBC and UBS.

HKEx has not borrowed in the loan markets since. As of December 31 2018, its borrowings amounted to a mere HK$1.17bn (US$149m), representing a gross gearing ratio of 3%. LSE’s gross borrowings at the end of last year totalled £2.2bn, including £1.2bn in bank loans that carry change of control provisions, according to its annual report.

Jumbo acquisition loans from Hong Kong are rare, and a £6.5bn facility would be the second-largest acquisition financing from the city after the US$12bn financing for PCCW’s buyout of Cable & Wireless HKT in April 2000.

REFINITIV QUESTIONS

HKEx’s proposed acquisition of LSE is conditional on the LSE terminating its acquisition of data company Refinitiv, the parent company of IFR and LPC. In August, LSE agreed to buy Refinitiv in a US$27bn deal and is raising a US$13.5bn bridge loan underwritten by Barclays, Goldman Sachs and Morgan Stanley.

The bridge will refinance a US$13.5bn leveraged loan and high-yield bond financing that was put in place last year to support US private equity firm Blackstone Group and its consortium partners for their purchase of a 55% stake in Refinitiv in October 2018 for US$20bn.

Following HKEx’s announcement on Wednesday, LSE said it is committed to, and continues to make good progress on, its proposed acquisition of Refinitiv. LSE will have to pay Refinitiv a break fee of £198.3m if it decides not to proceed with the acquisition. ( (Reporting by Prakash Chakravarti, Tessa Walsh and Apple Lam; editing by Steve Garton))