High-yield issue from China-based GITI Tire prices inside guidance

A last-minute document hitch postpones pricing by 24 hours, but strong demand for the $200 million secured note is unaffected.
The B3/B- senior five-year $200 million secured note from GITI Tire finally priced a day late on January 19 in Hong Kong.

GITI Tire is a privately owned entity belonging to a Chinese family based in Singapore and Indonesia. The bond will list in Singapore. The sale was arranged by Credit Suisse and Lehman Brothers.

The deal was meant to price on Thursday but eventually priced on Friday, reportedly because of changes in the security package. ôBy the time the change in the security package had been signed off, we did not have time to go back to the Asian investors, so we had to extend an extra day. But nobody left the book,ö says one source.

Part of the security package involved the pledging of the stake which parent GT Asia Pacific holds in GITI. Indeed, GITI is passing $160 million of the $200 million bond proceeds to its parent. In return, the parent was going to give a note to GITI that was secured by its holding in GITI Tire. That note was then going to be part of the collateral on the bond.

However, the issuers got legal advice late in the day that Singaporean companies were not permitted to do that. As a result, the security package had to be changed to ensure bondholders had the same kind of protection in the revised issue. ôBondholder security was not diluted, but it took a bit of extra time to sort things out and inform investors,ö says the source.

GITI Tire is the largest motor vehicle tyre manufacturer in China, headquartered in Shanghai.

ôB3/B- companies can have quite a range of yield; this deal is at the lower end of the ratings at which you expect a deal to get done, so itÆs at the higher end of the yield,ö says one source.

Apart from helping its parent, the proceeds are to be used for capital expenditure, general corporate purposes and possible acquisition of other tyre businesses. ItÆs also an opportunity to diversify funding away from the heavily reliance on Chinese banks.

Despite the companyÆs ôhigh level of leverage, weak liquidity and private family ownershipö, its competitive position, business diversification, revenue growth profile and profitability are scored Ba or better by MoodyÆs. Overall, MoodyÆs scores GITI a Ba3 credit.

According to MoodyÆs, adjusted total debt-to-Ebitda at GITI is currently around 7x, and Ebitda to interest cover is 1.5 to 2x. To see an improved rating, says MoodyÆs, the debt-to-Ebitda ratio would need to fall below 4x and the Ebitda-to-interest ratio would need to exceed 3-3.5x.

In particular, Moody's points out that 80% of the debt load is short term.

ôUS investors have always liked high-yields, but this deal signals a new appetite by Asian standards, because itÆs a (more risky) new issuer,ö comments one analyst. In fact, the company tried to IPO in HK in 2005, but cancelled because of the negative outlook at that time of the China car sector.

Despite these risks, investors have been eager to embrace the deal, with the issue pricing at a yield of 12.375%, based on a price of 99.544 and a coupon of 12.25%. ThatÆs a spread of 762.5 basis points over the reference December 2011 five-year treasury, currently trading at 99-14+ and yielding 4.750%, and 721.5 basis points over the five-year swap. The latter is yielding 5.16%.

The final yield is 12.5 basis points inside the final guidance figure of 12.5%, according to specialists and the issue reportedly saw demand just in excess of $1 billion from 125 accounts.

The issuer has a call option with a call premium equal to half the coupon from the end of year three and a quarter of the coupon from the end of year four.

ôThere are not many comps at this low rating, so in many ways itÆs a judgment call," says a specialist. "The questions investors had to ask themselves is æwhat is roughly a B-rated issue worth, taking into account certain levels of leverage?' Then it becomes something in the range of 50 basis points, 11.5-12%, 12-12.5%; and you also need to look at what is going on in the private loan market. Basically, itÆs a lot less straightforward than pricing a BB issuer, for which there are a whole lot of different comps.ö

During the roadshow, investors focused on prospects for earnings growth, given that tyre manufacturers suffered last year from yield compression on the back of higher rubber prices; the fragmented nature of ChinaÆs tyre markets; and rising competition from global players such as Bridgestone.

On the positive side, it is considered a growing sector, thanks to the rising number of cars in China, and more importantly, the fact that these cars are being used more, thereby increasing the need for replacement tyres. The companyÆs revenue has grown by an impressive 29% CAGR in 2003-2006, according to MoodyÆs. Total sales in FY2005 amounted to Rmb9.5 billion ($1.23 billion).

Also, investors approved the companyÆs leading status in China; its brands; and its successful export strategy.

ôI canÆt resist the yield, but frankly, for me this is a trading opportunity," says one investor in Singapore, who expressed reservations about the fact that some companies owned by the Liem family defaulted on their debt during the Asian financial crisis.

Indeed, the investor believes the issuer has left money on the table and that the price will trade up to a yield of 12% in the secondary market.

A different investor also believes that the macro conditions will help the deal. ôAt the beginning of the year, there was some uncertainty, followed by an improvement in sentiment, which sent US T-bond prices downs. However, I now reckon that US Treasuries have flattened out, which will encourage investors to be satisfied with the yield on GITI,ö he says.

Although the tyre business was a new business for many of the investors, the structure of being incorporated in Singapore was similar to that of many companies which are incorporated in Hong Kong but have their manufacturing facilities in the mainland.

Even as guidance got tighter, ôthe book never took a backward stepö, says one satisfied source.

The timing of the deal looks good, too: the interest rate pause by the US Federal Reserve has encouraged a great deal of money to flow into Asian high-yield bonds, say specialists.

The Reg-S deal saw a geographic split of 34.45% to Europe, 45.75% to Asia and 19.80% to offshore US accounts. The latter were primarily hedge funds.

In terms of investor types, the breakdown came in at 17.15% to banks, 73.85% to funds and 9% to private bankers.
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