Affinity, TPG to finance UTAC deal with cov-lite loan

Affinity Equity Partners and TPG Capital are planning to finance a $1.4 billion buyout of Singapore-listed United Test & Assembly Centre with a covenant-lite loan, as increased competition between lenders leads to greater flexibility for investors in the region.

Affinity Equity Partners and TPG Capital will fund a $1.4 billion buyout of Singapore-listed United Test & Assembly Centre with what some believe is Asia’s first covenant-lite loan.

The buyout firms have hired JP Morgan Chase, ABN AMRO and Merrill Lynch to arrange a $1.25 billion financing package, including a $600 million covenant-lite loan, according to a banking source.

Some media reports have suggested that this is the first time the controversial structure, which removes many of the traditional protections for lenders, has been used in a leveraged buyout in Asia. However, the source said that a number of large buyout firms who have conducted buyouts in the region have been refinancing their loans with covenant-lite structures in recent months.

The increasing prevalence of covenant-lite loans is “good news for private equity managers in Asia,” he said.

The last four years have seen rising competition between banks to finance the buyout deals taking place in the region, which has resulted in greater flexibility for financial sponsors, according to a fund manager who did not wish to be named.

Banks are also syndicating bigger loans and are more willing to take on greater risks by agreeing to extend covenant-lite debt structures, the banking source explained.

Since UTAC’s chip-testing business is subject to the cyclical nature of the electronics industry, it would previously have been an unsuitable candidate for more flexible debt packages. However, the structure TPG and Affinity have planned for their latest acquisition suggests this has begun to change.

TPG and Affinity plan to borrow about $600 million of covenant-lite loans with a seven year term. By December, UTAC plans to sell about $500 million of notes maturing in 7 to 8 years, and the buyout firms are considering using bonds known as payment-in-kind toggle notes, which allow borrowers to pay interest in the form of fresh debt rather than cash.

The private equity firms will also raise $150 million with a six-year loan to boost UTAC’s working capital.