This article first appeared in The Edge Malaysia Weekly on March 5, 2018 - March 11, 2018

TOP Glove Corp Bhd is in talks with financial institutions to raise as much as US$310 million (RM1.22 billion), banking sources familiar with the matter tell The Edge.

Documents sighted by The Edge indicate that Top Glove’s unit, Top Care Sdn Bhd, is looking at a US$155 million two-year term loan facility and US$155 million murabahah facility to help part-finance its proposed acquisition of Aspion Sdn Bhd.

This comes on the back of Top Glove’s announcement last November of its proposal to acquire Aspion from Adventa Capital Pte Ltd.

Aspion manufactures surgical gloves under the Finessis brand name. Surgical gloves are known to have higher margins compared with medical gloves.

Finessis gloves are developed in-house by Aspion and have a significantly low level of pinholes — a key consideration in the use of surgical gloves. They are also chemical and allergen free, which reduces the likelihood of chemical allergic reactions, thus allowing them to be used in a wider range of medical scenarios.

According to its latest annual report, Top Glove’s principal bankers are BNP Paribas Malaysia Bhd, CIMB Bank Bhd, Citibank Bhd, Deutsche Bank (M) Bhd, Hong Leong Bank Bhd, HSBC Bank Malaysia Bhd, Industrial and Commercial Bank of China (M) Bhd, Malayan Banking Bhd, Mizuho Bank (M) Bhd, OCBC Bank (M) Bhd, Public Bank Bhd, Standard Chartered Bank Malaysia Bhd, The Siam Commercial Bank PCL, Sumitomo Mitsui Banking Corp Malaysia Bhd and The Bank of Nova Scotia Bhd.

As for the proposed acquisition of Aspion, more details were divulged in January, such as the price tag of RM1.37 billion (US$348.60 million) — a cash portion of RM1.22 billion and the balance of RM150 million via the issuance of 20.50 million Top Glove shares at an issue price of RM6.68. The acquisition will be undertaken by Top Glove’s wholly-owned subsidiary, Top Care Sdn Bhd.

As for the details of the term loan facility, Top Glove is looking at paying Libor plus 82.5 basis points per annum for the first 12 months and Libor plus 132.5 basis points per annum for the second 12 months. For the murabahah facility, it is looking at Libor plus 125 basis points per annum.

After the Aspion acquisition, the maximum consolidated debt to consolidated earnings before interest, taxes, depreciation and amortisation decreases from an estimated 3.95 times in 2018 to an estimated 3.75 times in 2019 and maintains at an estimated 3.5 times until 2023.

In preliminary documents to bankers, the rubber glove maker says the minimum consolidated debt service coverage ratio is slated to be 1.5 times. Debt service coverage ratio measures the cash flow available to settle debt obligations.

As part of its pitch, Top Glove highlights that currently, it has a 20% share of the surgical glove market, or about one billion pieces out of a total global surgical glove industry volume of 5.1 billion pieces. However if it acquires Aspion, it will have a 51% share or 2.6 billion pieces of the 5.1 billion global surgical glove market.

As for the big picture, Top Glove adds that the total demand for global gloves is 215 billion pieces, of which it has a 28% market share or 60.2 billion pieces. After the acquisition of Aspion, it will have a 30% market share, or 65.5 billion pieces.

According to a banker, it is likely that Top Glove may opt for financing from a foreign bank, considering the facility is in US dollars. He adds that Top Glove is looking to ink the loan agreement by the end of the month, with a drawdown of the facilities between early March and early April.

However, another banker says the deadline may be a bit too optimistic. He feels things may be delayed with the recent festivities.

Top Glove executives declined to comment when contacted.

However, the move to scout for funds should not come as a surprise as in its announcement of the proposed acquisition, Top Glove had said the “total cash portion of the purchase consideration amounting to RM1.23 billion will be funded entirely by a combination of conventional term loan and Islamic term financing”.

Meanwhile, the guarantors for the credit facility are the listed entity Top Glove and its two wholly-owned subsidiaries — Top Glove Sdn Bhd and TG Medical Sdn Bhd.

According to Top Glove’s documentation, apart from the syndicated loan of US$310 million, the group plans to roll over as much as US$59 million of Aspion’s debt and use up US$43 million of its existing cash hoard.

A rollover involves extending the maturity of a debt, either by agreeing with the financial institution to go on the same terms or on new terms, or by refinancing it with another party on new terms.

As at end-November last year, Top Glove had cash and bank balances of RM162.09 million (US$41.34 million) and investment securities of RM242.34 million (US$61.75 million).

On the other side of the balance sheet, it had short-term debt commitments of RM272.91 million and long-term borrowings of RM51.50 million.

Top Glove’s finance costs for the first three months ended November 2017 amounted to only RM1.6 million.

To its credit, Top Glove has also wrangled a profit guarantee, whereby if Aspion’s core profits after tax for its financial years ending October 2018 and 2019 are less than targeted, the vendors will reimburse any shortfall to a limit of RM100 million.

Top Glove’s shareholders are scheduled to convene an extraordinary general meeting to vote on the acquisition on March 8.

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