Chinese pulp and paper company Nine Dragons Paper pulled off this yearÆs first triple-B rated deal with a $300 million five-year Reg-S 144A transaction, opening the market yet wider after SwireÆs non-government linked deal last week. The deal should pave the way for other similarly rated companies, and bodes well for a revival of AsiaÆs high-yield market.
The deal is also the first bond from a debut Asian issuer to tap the international markets in 2008.
The transaction, which was sole-led by Merrill Lynch, built a book of $500 million from 70 accounts, although the number of investors who were actually allocated bonds is unknown. Fifty percent of the bonds were sold into Asia, 40% into the US and 10% into Europe. In terms of investor-type, 50% of the bonds were bought by funds and asset managers, 10% by banks, 30% by insurance companies and 10% by private banks.
The deal priced at 505.2bp over five-year Treasuries, or a yield of 8%, with a coupon of 7.785%. This was a challenging credit story and the borrower reportedly spent a significant number of man-hours last week educating investors about the strength of its credit. The company also took time to introduce investors to its strong and competent management team.
Nine Dragons is the largest company of its kind in China. It has shown an ability to pass on potentially higher material costs to consumers. Moreover, the industry benefits from a favourable regulatory environment, and has maintained relatively healthy Ebitda margins of 25% to 28%, versus 10% to 20% for similar companies in the US. In December 2007, the companyÆs net leverage stood at 2.8 times.
Investors took a chance on this credit which lies on the cusp of investment grade, rated BBB- by both Standard and PoorÆs and Fitch. Nine Dragons addressed credit downgrade risk by offering a coupon step-up to its bonds, namely an extra 100bp if the rating drops below investment-grade, and a further 200bp should a rating suffer a downgrade to below BB. In comparison, US companies have offered just 25bp per notch.
In terms of secondary performance, the bonds tightened during US trading, then widened during Asia trading. ôIt looks as if there were add-on buyers in the US, and then some sellers in Asia yesterday morning,ö says an investor. The bonds held around re-offer at 506/502bp over Treasuries.
ôMerrill Lynch was possibly supporting the deal. This wouldnÆt be surprising since the level of subscription was not huge,ö says a source on the buy-side.
ôA bond trading at re-offer is a good thing,ö says another investor, ôand no-one has lost any money on this trade.ö Though another investor was somewhat disappointed with the aftermarket performance. ôI personally consider this a quasi high-yield transaction,ö he says. ôThe high-yield index has rallied 20bp, and unfortunately these bonds have not performed in line with that. But I suspect they will settle down, given a little time.ö
There were no obvious comparables for the transaction, although sources quoted GazpromÆs latest $1.5 billion dual-tranche deal. Its five-year bonds were trading at 458bp over Treasuries, while its 10-year bonds traded at 450bp over Treasuries. Similarly rated US pulp and paper companies were trading in the area of 200bp over Libor. (Nine Dragons priced at approximately 420bp over Libor).
ôThe deal priced with a new issue premium (not small these days), an Asia premium, and a premium for being a new credit,ö says a syndicate banker. ôThat is what it took to get it off the ground.ö
Given the challenges of the credit, itÆs great news that the deal closed. Less than a fortnight ago, some bankers saw little chance of a triple-B rated company coming to market, but since then markets have stabilised following a series of better-than-expected earnings reports. ôThe outlook is better. A massive $17 billion-worth of issuance came out of the US overnight demonstrating the extent of positive sentiment at the moment,ö says another syndicate banker. ôHopefully, weÆll see several more transactions in the next month, but we are still not out of the woods.ö
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