China credits mandate international debt deals

Two mid-cap China plays aim to expand the Hong Kong/China credit universe.

Road King Infrastructure and Chaoda Modern Agriculture are preparing to launch international bond issues in what should mark a welcome diversification away from the Hong Kong corporate heavyweights that have historically dominated issuance from the Territory.

Few Chinese corporates have ever tapped the US dollar markets because there are still hardly any instruments with which to hedge a RMB-denominated balance sheet. From Hong Kong itself, there has been a steady stream of issuance over the years, but it has been largely concentrated among a few regular, benchmark issuers that are either government-owned, or property developers.

True corporate issuance from China is rare and what few deals there have been tend to originate from state-owned giants such as Citic, CNOOC and Cosco. By contrast, both of the two new deals hail from the private sector and are Hong Kong-listed mid caps.

Chaoda is preparing a $150 million to $200 million deal via its house bank Credit Suisse First Boston, while HSBC has the mandate for a $150 million issue by Road King. The latter will begin roadshows in Hong Kong today (Tuesday) before moving to Singapore ahead of pricing some time next week.

Proceeds from the 10-year deal are being used to re-finance a previous eurobond, which is callable in mid-July at $102. A new deal makes sense given that it is being pitched around the 7% mark compared to a coupon of 9.5% on the old deal.

Road King first tapped the international bond markets in the summer of 1997 with a 10-year bond lead managed by the now defunct Peregrine. It has since bought back about $60 million.

However, while the original bond was a high yield credit with a double B rating and numerous covenant provisions, the new deal is an investment grade credit with a low triple B rating and no covenant provisions.

So too, where the original deal was considered more of a project finance bond, the new deal is plain vanilla. Road King now operates a more mature, debt-friendly business, with its portfolio of toll roads and bridges throwing off stable and predictable free cash.

In February 2002, it gained investment grade status from Standard & Poor's and is currently rated BBB- with stable outlook. Being considered an improving credit is likely to give it some pricing momentum with investors, which may result in final pricing settling close to the once mighty Hutchison Whampoa. The latter has an A3/A- rating and a January 2104 bond outstanding, currently yielding 7.01% or 220bp over Treasuries.

Fund managers say Road King is also aiming to price at a low 200bp spread to Treasuries. There are virtually no comparable benchmarks, although PCCW has a one-notch higher rating of Baa2/BBB. The telecom operator has a July 2013 bond outstanding, currently yielding about 6.72%, equating to 154bp over Treasuries.

Road King is majority owned by the Wai Kee group, which has a 44% stake, but does not control the board. Its second major shareholder is British transport group Stagecoach, which owns 32%.

In its most recent ratings release, published last August, S&P commented that Road King has a well diversified portfolio, high levels of cash and low levels of debt. At the end of 2003, it had HK$488 million ($62.5 million) in cash and equivalents on hand and reported a net gearing ratio of 11%.

Since then, however, it has raised $120 million from a five-year revolver. This was priced with a headline margin of 75bp and front end fee for lead arrangers of a further 70bp.

The agency also pointed out that Road King is highly reliant on dollar debt, which constitutes over 90% of the total.

Slightly behind Road King, Chaoda is gearing up for a five-year deal via CSFB. Yesterday the company received ratings of Ba3/BB with stable outlook from the two international agencies.

The company is China's largest integrated fruit and vegetable producer with an emphasis on organic producers and is one of the world's lowest cost producers. However, the fragmented nature of China's agricultural sector means it represents less than 1% of the market as a whole.

In a previous interview with FinanceAsia publlished earlier this year, CFO Gordon Wang said, "China is like the US back in the 1920's. The industry is highly fragmented with 230 million producers. We, however, benefit from economies of scale. Our smallest farm is 300 hectares, which is 1000 times as large as the plots of the average producer."

But Wang also went on to say that investors often failed to understand the company's business model, which relies heavily on leasing land from lots of smallholders rather than owning it outright. So far this has generated high margins, with Chaoda recording an operating margin of 50% in 2003.

In its ratings release, Moody's said Chaoda maintained a strong financial profile for its rating category, with debt to EBITDA of 0.6 times in 2003, an EBITDA interest coverage ratio of 49 times and debt to capitalization ratio of 14%.

At the same time it projected negative free cash flow over the coming few years thanks to an aggressive expansion plan and highlighted potential corporate governance concerns. Chaoda's auditor PricewaterhouseCoopers resigned last year and the company has also been tainted from the fall-out of the Euro-Asia scandal since both companies operate in the same sector.

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