Private equity-owned firms behind Asia high-yield corporations, says Moody's

Munchy, which reported a net profit of RM41.34mil on the back of a RM283.67mil revenue in 2015, was earlier said to be the target of locally listed special-purpose acquisition company (SPAC) Red Sena Bhd, which is focused on the food-manufacturing sector. (Picture shows some Munchy products)

KUALA LUMPUR: Asian high-yield corporates owned by private equity firms benefit from strong margins despite high leverage, says Moody's Investors Service.

A Moody's vice president and senior credit officer Brian Grieser says such PE-owned companies in Asia benefit from strong margins, predictable cash flow generation and good liquidity buffers; factors.

These factors balance their higher leverage profiles, aggressive  growth strategies and return-focused financial policies when compared with other Asian high-yield corporates, he said in a statement issued on Tuesday. 

Moody's conclusions are contained in its just-released report titled "High-yield corporates – Asia: High leverage of PE-owned companies balanced by strong business profiles in Asia," and is authored by Grieser.

Moody's also points out that the number of rated PE-owned companies in Asia has doubled in less than two years to 12 at Oct 31, 2018 from six at the end of 2016.

"As for the existence of third-party equity holders, such investors  discourage the overleveraging of balance sheets for PE-owned companies, with such leveraging aimed at improving PE returns," Grieser added.

Moody's explained that almost all PE-owned high-yield companies rated Ba3 or higher in Asia benefit from third-party equity ownership in excess of 25%. 

As a result, these companies maintain lower leverage profiles when compared with other PE-owned high-yield peers in the region.

Moody's report explains that in Asia, higher financial leverage differentiates lower rated PE-owned high-yield companies from high-yield corporates in general. 

In particular, low-rated PE-sponsored companies tend to demonstrate elevated leverage because of debt-funded buyouts, dividends recapitalisations or aggressive growth strategies.

Moody's expects its rated portfolio of PE-owned companies in Asia will grow to include more business and consumer services, healthcare, education, manufacturing and telecommunications infrastructure companies. 

Companies in these industries typically generate margins and cash flow that allow them to service higher debt levels or operate asset-light business models that have low capital investment requirements.

In Asia, these industries benefit from strong underlying growth dynamics that provide PE firms the opportunity to rely less on dividend recapitalisations to deliver returns.