China Forestry, China’s second largest privately owned forestry company, has made its debut in the international debt market with a $300 million five-year bond. The Reg-S/144A notes priced early Wednesday morning with a 7.75% semi-annual coupon. The notes were reoffered at par to yield the same 7.75%.
The maturity date has been set to November 17, 2015 and the notes are callable after three years.
This new bond is China Forestry’s only outstanding debt and comes less than a year after the company listed on the Hong Kong stock exchange in early December last year. Therefore, the credit was attractive to investors who are keen to diversify their China high-yield portfolios away from the property sector.
The bonds were initially scheduled to price New York time on Wednesday, however, joint bookrunners Deutsche Bank, Standard Chartered Bank and UBS decided to accelerate the process and bring the pricing forward by one day in order to take advantage of strong demand and shield the borrower from the ongoing volatility in the market.
“We had the momentum in the deal… to push this forward… and close it out,” said one banker.
The strategy paid off in the primary market with the bookrunners securing a final order book of $2 billion from 190 accounts.
China Forestry went out with an initial whisper of a yield in the high 7% range during the London trading session on Monday. One source noted that the borrower was able to attract sizeable orders on the back of this whisper and the guidance was later adjusted to a yield in the range of 7.75% to 8% and a deal size of $200 million to $300 million.
The most liquid Chinese credit in the same sector is Sino-Forest, which has outstanding bonds maturing in 2014 and 2017, and investors naturally turned to this as a benchmark.
At the time of pricing, the Sino-Forest 2017s were trading at a 6% yield and the 2014s were quoted at about 5.65%. One banker explained that if Sino-Forest was to issue a new five-year note, it would be expected to come at about 6%, including a new issue premium.
This means the yield on the new China Forestry 2015 bonds was about 175bp higher than on an equivalent Sino-Forest bond despite the fact that the former, as one banker put it, has "a better credit story”.
China Forestry's operations are considerably smaller than those of Sino-Forest which is its largest competitor. Revenues are 10 times lower and its plantations cover 172,000 hectares compared to Sino-Forest’s 726,000 hectares. That said, China Forestry enjoys a much healthier Ebitda margin of 66%, compared with Sino-Forest's 33%.
“Despite the size difference [China Forestry] has a viable business model, which is very well known and respected,” said a source. “These guys are the fifth largest forestry company globally with a $1.5 billion market capitalisation.”
The bonds traded up by 1.5bp in the secondary market yesterday, indicating that some investors clearly found the pricing attractive. In comparison, the Sino-Forest 2017s were trading at 6.11% and the 2014s were at 5.83%, which resulted in the gap to the new China Forestry bonds tightening to 150bp.
Asia-based accounts bought 47% of the deal, with European and US accounts splitting the remainder, taking 26% and 27% respectively. Fund managers and hedge funds jointly received 65% of the sale, banks 10%, private banks 14%, insurance 7% and corporate accounts 4%.
The notes have been rated Ba3 by Moody’s and B+ by Standard and Poor’s.
The next bond to follow from the China high-yield sector is China Oriental. This will be the second bond this year to be issued by the steel manufacturer which was in the market as recently as August when it sold $550 million of 8% bonds due 2015.