Nine Dragons' buyback attracts little extra interest

The company achieves a 58% acceptance rate for its bond buyback tender which closed on Monday û only marginally more than the 57% tendered by the early deadline.

Nine Dragons Paper said yesterday that it will buy back a total of 58% of its 7.875% senior bonds due 2013 after its month-long buyback tender closed at the end of London trading on Monday. This is only marginally more than the 57% acceptance rate that it achieved before the original early tender deadline in February and confirms that investors who are interested in cutting their losses by selling back bonds at a reduced price will typically make up their minds early.

Or looking at it another way, investors who decided to hold on to the bonds could not be swayed even after the company confirmed that more than half of the outstanding bonds would be removed from the market and liquidity would be severely reduced. It mattered little that Nine Dragons scrapped its plan to reduce the offer price by 5 cents per dollar for bondholders that failed to tender their bonds before an early deadline and instead offered to pay the full offer price of 53 cents on the dollar to all bondholders who tendered before the final deadline on Monday.

In a brief statement after the Hong Kong market closed yesterday, the China-based paperboard manufacturer said that $165.177 million of the principal amount of the notes in question had been tendered in total by the close of the offering, compared with $160.4 million tendered before the end of the early deadline. When the buyback tender was launched on February 9, $283.75 million of the original $300 million bond remained outstanding. Merrill Lynch was the sole arranger of the buyback.

The total amount to be paid by the company to the bondholders, including accrued interest, will be about $94 million, meaning the company will make a profit from the transaction. It will also reduce its future coupon payments and lower its gearing ratio.

Together with the $16.25 million worth of bonds that were repurchased in the open market in December 2008, the company has now bought back $181.4 million worth of bonds, or just over 60% of the initial principal amount, leaving close to 40% outstanding.

Nine Dragons was keen to reduce its debt levels after Standard & Poor's downgraded its corporate rating in December to BB- from BBB-. This pushed the paper manufacturer into high-yield territory after being ranked as a low investment grade company when the bonds were issued in April last year and triggered an increase in the coupon payments from 7.875% to 9.875% from the next interest payment date in late April.

Since the bonds were issued just under a year ago, Nine Dragons has slowed its pace of expansion due to the financial crisis and consequently it has the cash needed to buy back the bonds. However, the bondholders did have to take a haircut of 47% on the principal to get their hands on this cash, which explains why some of them opted to keep the bonds until maturity. This is especially true since Nine Dragons -- while suffering from a decline in demand due to the economic downturn like everyone else -- isn't currently in direct financial trouble and there are no signs that it will not be able to pay back the full principal when the bonds mature.

This is clearly not the case for some of the other companies that are in the market with buyback tenders for bonds or convertible bonds. Taiwanese memory chip maker ProMOS Technologies and Chinese aluminium producer Asia Aluminum, for example, are both saying that bankruptcy will be a clear option if their respective bondholders choose not to accept their tender offers. This essentially forces investors into accepting a haircut of more than 70% or take the chance that they may end up with even less if the companies undergo a court-protected debt restructuring or liquidation.

Nine Dragons is the largest producer of packaging paperboard products in Asia in terms of design production capacity. It primarily manufactures linerboard, high-performance corrugating medium and certain types of coated duplex board. It also makes specialty paper, wood and bamboo pulp through one subsidiary, and produces unbleached kraft pulp through another subsidiary.

¬ Haymarket Media Limited. All rights reserved.
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