Debut high-yield issuer Lumena offers chance to diversify

The world's second largest thenardite producer sells $250 million of 12% five-year bonds.

Chinese chemicals company Lumena Resources last night priced a $250 million high-yield bond, becoming the first debut issuer in the Asian non-investment grade market for more than two years. But this deal also gave investors something that is even rarer - exposure to a new and largely unknown sector -- which meant it offered a real diversification opportunity for investors who were prepared to do a bit of work.

It wasn't an easy sell though. The bookrunners -- BOC International, Credit Suisse and Deutsche Bank -- spent almost two weeks on the road with the management in an attempt to explain the company, the business and not least the industry dynamics -- a process not dissimilar to that undertaken by the company in June when it tried to rally equity investors to buy into its initial public offering and Hong Kong listing.

The Sichuan-based company is the world's second largest producer of thenardite, which is a solid form of sodium sulphate and an important raw material for the production of powder detergents, dyes, textiles, glass, kraft pulp and pharmaceutical products. With a 23% market share it has a strong position in the Chinese market for these products, which has seen an increase in demand alongside China's rise to become the manufacturing centre of the world and many of Lumena's customers are multinationals with production facilities in China that use thenardite in their production processes.

Lumena has seen a 10-fold increase in net earnings in the past couple of years after a management buyout in 2004 transformed it from a state-owned enterprise into a fast-expanding private sector company. However, with a focus on only one product, it is still a small niche player in the chemicals industry where most of its larger global peers tend to produce a range of products.

Given the lack of comparables, one of the key difficulties was to come up with an appropriate valuation and sources say the investor feedback in this respect varied widely. It is fair to say, though, that Country Garden, which last month raised $300 million (later increased to $375 million) from the first Chinese high-yield bond in two years, provided something of a floor. The real estate developer priced its five-year bond with an 11.75% coupon on September 2. However, Country Garden is a repeat issuer from a well-known sector -- albeit one that has its problems -- which ought to have made it an easier sell.

Being a first-time issuer without a track record, Lumena naturally had to pay a bit more.

The bookrunners went out with yield guidance in the "12.25% area" in the Hong Kong morning on Tuesday, and early Wednesday confirmed that the yield would indeed be fixed at 12.25%. At the same time they also fixed the size at $250 million. When the books closed in the Hong Kong evening yesterday, the bonds were priced with a 12% coupon and a reoffer price of 99.085.

The deal, which matures in October 2014, attracted 71 investors and was said to have been about two times covered. Funds and hedge funds bought 71% of the offering, while 15% went to banks, 11% to retail investors and 3% to insurance companies. The domination of funds is not that surprising since most high-yield specialist investors fall into this category. The $800 million high-yield offering from Indonesian coal miner Adaro, which priced early Friday last week, saw 68% allocated to real money portfolio managers and hedge funds.

However, one source said the high level of interest from fund managers also reflects where the fund flows are at the moment. "Real money funds in Europe and the US have seen huge inflows lately and are looking for places to invest that money," he said.

In that respect, Asia is a good place to look. Since the beginning of September there have been no fewer than 16 international bonds from Asian issuers, including four in the course of 24 hours on Friday/Saturday last week. And corporates continue to line up to take advantage of the low-interest environment. In the immediate pipeline are Noble Group and two more Indonesian coal producers -- Indika Energy and Buma -- while there is also talk of a potential dollar issue from Bank of East Asia.

In terms of geographies, 41% of the Lumena deal was bought by US investors, showing it was worth the effort and cost to register the deal as a 144A trade, which is needed if you want to market a deal to onshore US investors. European accounts took 33% and the remaining 26% went to Asia-based investors.

Structurally, this bond is no different than other Chinese high-yield issues, i.e. the bookrunners didn't have to retort to any unusual covenants to get investors comfortable with the trade. However, Moody's noted that Lumena has to meet a fixed-charge Ebitda-to-interest coverage ratio of 3.0 times until December 2010, 3.25 times before December 2011 and 3.5 times from 2012 onwards.

There is also the usual 50% restriction on dividend payments. In connection with its IPO, Lumena said it intends to pay out a minimum of 25% of its net profits starting from 2010.

About half of the bond proceeds ($123 million) will be used to repay a one-year bridge loan provided by BOCI in August, which was partly used to pay for the acquisition of the final 10% of the company that owns the Dahongshan mine -- the one mine that the company relied on for its production of powder thenardite during its days as an SOE.

After repaying that, Moody's said it expects Lumena's debt-to-Ebitda ratio to remain below three times, which is a strong financial profile for a company at its ratings level, However, the management's financial discipline is untested and given the company's short history in its current form and its rapid expansion plan, there are questions about how sustainable that profile may be in the medium term, the rating agency added. Moody's rates Lumena -- and the bond -- B1, while Standard & Poor's has assigned a one-notch higher rating of BB-.

Supporting the rating, Moody's said, is the company's strong market position and a profit margin of around 70%, which balances out the fact that it has had a negative cashflow for the past three years -- a situation that is expected to continue for another two years at least. The high margins also give the company a buffer in case of fluctuations in selling prices or demand.

Following this bond issue, it also has "fairly low near-term refinancing needs", the rating agency said. 

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