Panva Gas made its high yield debut yesterday (September 16) with an upsized $200 million bond issue via Merrill Lynch and Morgan Stanley. The seven-year offering by the Hong Kong-listed operator attracted a gigantic order book of $1.5 billion, making it the most heavily oversubscribed high yield bond deal from Asia in a very long time.
The deal's rapturous reception stands in stark contrast to the dismal market conditions Asian issuers experienced before the summer break when transactions struggled to get to market and mostly had to be restructured or postponed. Instead, the Ba1/BB+ rated deal has been a clear beneficiary of buoyant global bond markets. Expectations of gradually rising interest rates have made investors less risk averse and secondary spread tightening has fuelled primary market momentum.
Panva priced its deal at par with a semi-annual coupon of 8.25% to yield 446bp over Treasuries. Fees are said to have been 2% on a blended basis.
At the beginning of roadshows, the leads set off with indicative guidance around the 8.5% level. Within a day, the order book was already two times covered, prompting revised guidance of 8.375% to 8.5%. This was then further revised down to 8.25% to 8.375% and a decision was taken to price the deal a day early.
With such a large order book, some might query whether the pricing could have been pushed even tighter. However, specialists believe the deal might have unravelled at this point given the huge order inflation. "The true order book was probably more like $500 million," says one.
Instead the deal was upsized by $50 million.
The most relevant comparable is Sino-Forest, which completed a $300 million seven-year deal in early August. The Chinese forestry operator has a Ba2/BB- rating, one notch lower than Panva Gas on Moody's side and two notches lower on Standard & Poor's.
Its deal was priced at par with a coupon of 9.125%. Since then it has traded in just over 50bp and was being quoted yesterday at 8.6% bid.
Investors' positive experience with Sino-Forest is likely to have fed through to Panva, which also operates in China. A total of 130 investors participated in the latter's deal.
By geography, the deal split 55% Asia, 35% Europe and 10% offshore US. By investor type, asset managers took 69%, banks 16%, private banks 14% and others 1%.
Usually most Asian high yield deals are driven out of the US where investors typically demand a large pricing premium over domestic comparables because they hold all the pricing leverage and are less familiar with Asian credit fundamentals. In this instance, the Reg S format precluded much US participation and the deal was able to generate more than enough demand from Asia itself.
Partly this may be because Panva is already relatively well known to investors, having skillfully built up an international profile through a series of gradually increasing equity and equity-linked deals. So too, investors are aware that there is still quite a large pricing differential between credits on either side of the investment grade and high yield divide.
Chinese toll road operator, Road King, for example has a Baa2/BBB- rating, one notch higher than Panva Gas on Standard & Poor's side. Yet its seven-year bond issued in July is currently trading about 200bp tighter.
Should Panva achieve investment grade status, the high yield covenants package underlying the deal will fall away. Prior to that, there are limitations on operating company indebtedness relative to total assets (15%) and minimum interest coverage ratios starting at 2.5 times and rising to 3 and then 3.5 times over succeeding three year periods. This is likely to have comforted investors given the group's ambitious expansion plans, which are likely to be debt funded.
At the end of 2003, the group ran a debt to EBITDA ratio of 1.4 times, EBITDA/interest coverage ratio of 29 times and debt to capitalization ratio of 32%. The company has told the rating agencies that debt to capitalization is likely to rise to 45%, but will not top 50%.
Panva has built a strong niche for itself acquiring majority interests in established municipal gas distribution networks in China and then successfully restructuring them. It currently has 26 operations spanning eight provinces.
The company was established in 1998 and initially concentrated on bulk and retail LPG sales. More recently it has moved into the higher margin piped gas business.
In the first half of 2004, revenue grew 21% to HK$848.6 million ($108.8 million) and net profit by 15% to HK$95.4 million ($12.2 million).
