The company suffered downgrades by Standard and PoorÆs and MoodyÆs at the beginning of the week. Standard and PoorÆs lowered its rating to BB (two notches below investment grade), while MoodyÆs downgraded it by one notch to Ba2. The ratings agencies are concerned about the higher exposure to ChinaÆs competitive real-estate development sector, and Road King's limited experience in this sector. According to Standard and PoorÆs report, the company has experienced an increase in ôcashflow volatility since property development became a significant part of its operations in 2004ö.
Investors are likely to be cautious during this transaction, given the steady decline of the credit over time due to the managementÆs aggressive expansion strategy into the high-risk China property market. Sources from the buy-side say that investors have liked the name in the past, with the toll-road business representing a steady cashflow. However, bondholders have gradually seen the spreads deteriorate as the company has diversified.
Nonetheless, Standard and PoorÆs believes Road KingÆs high level of asset portfolio diversification to be a major strength. Some of the toll roads and the property developments are taking place in the same area, which allows for ôdiversification benefits and synergistic relationships relationships with government authorities, and a good understanding of market fundamentalsö.
Sources say some banks advised the company to perform a less aggressive deal to protect its ratings. JPMorgan and DBS are likely to have delivered a more aggressive pitch, hoping that they can pull the transaction off in the current market.
Road KingÆs toll-road projects encompass 19 expressways and highways across eight provinces. The company also has a 100% stake in six residential and commercial property developments, which total 1.5 million sqm. Late last year, the company invested in Suzhou Sunco, through which it acquired 100% of Phoenix City û a residential and commercial development project (1.4 million sqm). The company also acquired a 49% stake in Sunco Property (0.8 million sqm) as part of its bid to significantly enhance its property development business.
The proceeds of the fixed-rate note will be split between paying outstanding land premium payments due by Suzhou Sunco, and financing the acquisition of new land in the PRC. The proceeds of the FRN are expected to refinance existing debt.
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