King of the road?

Road King returns to the US dollar bond market for the first time since 1997.

Chinese toll road operator successfully accessed the international bond markets yesterday (Thursday) raising $200 million from a seven-year Reg S deal led by HSBC.

Backed by a Baa2/BBB- rating, the deal was priced at 99.910% on a coupon of 6.25% to yield 6.266%. This equated to 212bp over seven-year Treasuries and 165bp over Libor. Fees were 30bp.

Just over a week ago, it looked like the deal might be dead in the water. China mid-cap Far Eastern Polychem had blown up and Asian bond markets were stalling, with investors reluctant to participate in new issues after suffering a series of losses from the market's most recent offerings.

Having launched roadshows, HSBC decided to withdraw and restructure the deal from a 10-year to a seven-year. It hoped that cutting the maturity would draw in banking as well as fund management demand.

The deal was then re-launched this week as the market tone improved following the announcement of weak non-farm payrolls, which triggered a 30bp decline in Treasury yields. The lead also thought it would be better to launch ahead of the heavy supply expected in July.

The result was a comfortably oversubscribed, but heavily concentrated order book. Final demand amounted to $340 million, but only 25 investors participated.

By geography, the book split 46% Hong Kong, 30% Singapore, 19% Europe and 5% other Asia including Australia and China. By investor type, fund managers took 51%, banks 47% and retail 2%.

Bankers say the best comparable is probably China Insurance International Holdings (CIIH). Both CIIH And Road King are Chinese corporate credits and both are rated BBB- by Standard & Poor's.

At the time of pricing, CIIH's 5.8% November 2013 bond was trading at about 153bp over Libor, some 12bp tighter than Road King. The curve is worth about 10bp, meaning that Road King has come about 22bp wider on a like-for-like basis.

The differential can be attributed to investors' pricing power, the need for a new issue premium and the fact that CIIH benefits from a slight sovereign halo effect.

But Road King has locked in funds ahead of new supply and further interest rate rises. It has raised the full amount it sought and will now re-finance a previous eurobond, which is callable in mid-July at $102. This carries a coupon of 9.5% compared to 6.25% on the new deal.

Had the company been able to persuade investors to look at a 10-year maturity, it would have been looking at a yield around the 7% mark.

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%.

The company is one of the Mainland's largest toll road operators, with total investments of RMB5.7 billion in 2003. Its portfolio of 21 projects are spread over eight provinces and most have operating histories of more than four years.

The rating agencies describe its cash flows as stable, although it is planning to seek new investments in China, subject to a HK$3.1 billion total cap.

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