Citic Envirotech bond flushes out strong demand

Singapore-listed wastewater treatment operator closes its order book early to cope with extremely strong private banking demand.

Citic Envirotech, a Singapore-listed waste water treatment company, launched an extremely well-received perpetual non-call three bond on Thursday, leading lead manager DBS to close the order book early to prevent demand spiralling out of control.

The city state's army of private banking clients drove the deal after latching on to one of the few bonds in the Chinese credit spectrum that still has a 5% handle attached to it. 

Having launched the deal with initial guidance of 5.75%, DBS quickly tightened the range to 5bp either side of 5.5%. The bank also informed investors the book would shut early at the end of the Asian morning after amassing demand of $950 million within the space of a few hours. 

The company, which was taken over by Citic Ltd and KKR earlier this year, had originally wanted to cap the deal at $150 million but decided to upsize it slightly to $175 million so more of the order book could be allocated. 

Final pricing of the unrated Reg S deal was fixed at par with a coupon of 5.45%, equating to 424.3bp over Treasuries. 

A total of 54 investors participated with a split, which saw 83% allocated to private banks, 12% to fund managers and insurers, with the remaining 5% to others. 

The deal is callable at par in three-years and has a cliff structure, which sees the coupon step up to 500bp over the prevailing three-year Treasury rate if it is not called. The coupon further steps up by the same margin every three years thereafter.

Terms also include a change of control put, plus a dividend stopper and pusher, which has a 12-month look-back. 

"This deal just pushed all the right buttons with investors," one banker commented. "They like cliff step-up structures and this company is well-known to them having been listed on the local exchange for the past decade.

"They also liked the fact that it has strong Chinese SOE backing and also private equity involvement through KKR, which will have done a lot of due diligence before putting their money in."

Earlier this year, the group completed an S$225 million ($159 million) three-year issue with an April 2018 maturity and 4.7% coupon. This was trading at 4.37% at the time of pricing. 

The main comparables were other perpetual bonds by unrated Chinese corporates, including one by the company's ultimate parent Citic Ltd. This 8.625% deal was trading on a mid-yield of 3.82% to its November 2018 call date. 

Other comparables include Chalco Hong Kong Investment's 6.625% perp, which was trading on a mid-yield of 4.96% to its October 2018 call date.

Optimising its capital structure

Citic Envirotech's transaction has been launched off its newly established $750 million perpetual securities issuance programme. Analysts believe the programme will enable the group to lower its cost of debt from a current average of 8.4% and boost its return on equity.

In previous filings, Citic Envirotech has said it intends to use most of the proceeds from the programme to optimise its capital structure, with about $150 million being used to fund new projects. 

According to CIMB research, the group had total debt outstanding of S$601 million at the end of 2014, which is projected to rise to S$928 million at the end of 2015. Net gearing stood at 45.6% at the end of the first half.

CIMB also reported that KKR is in the process of sealing an S$192 million three-year syndicated loan for the group to use for dividend re-capitalisation. 

The company recently announced disappointing second-quarter results with revenue falling 32.7% year-on-year to S$70.9 million. This was the result of declining revenues from its engineering division, which was down 62.9%, although somewhat offset by rising revenues from membrane sales, which were up 96.3% and treatment income, up 28.9%. Higher membrane sales enabled it to boost its gross margin from 29.2% to 37.6%.

However, analysts said engineering income can be lumpy and remain positive because of the One Belt One Road projects it may win over the coming few years. One day before the deal was announced, Citic Envirotech said it was close to winning Rmb1 billion ($156.55 million) of new projects.

Its parent has also previously said it plans to invest Rmb700 billion to support the government's new Silk Road initiative. 

Alongside DBS, Citic CLSA was also a joint lead manager.

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