Road King prices high-yield bond in line with guidance

The company's forthcoming IPO plays a key role in the pricing of the $350 million deal.
Road King priced a dual-tranche senior Reg-S bond on Friday, closing at 225bp over three-month Libor for the $100 million (upsized to $150 million) five-year non-call-one FRN, and at par with a yield of 7.625% for the $200 million seven-year non-call-four fixed-rate note. Agencies rated both transactions BB/Ba2.

The deal was managed by JPMorgan and DBS.

Demand reached $546 million on the FRN, equivalent to an oversubscription of 3.6 times. 88% of the bonds sold to Asia, 7% to Europe, and 5% to the US. In terms of investor type, 41% went to asset managers, 28% to banks, 18% to funds, 1% to insurance and pension funds, 7% to retail and 5% to other.

The fixed-rate note's order book reached $755 million, with an oversubscription of 3.8 times. Road King allocated 87% of its bonds to Asia, 8% to Europe, and 5% to the US. Asset managers bought 43% of the bonds, banks 26%, funds 21%, and insurance and pension funds 5%. Initial guidance had been set at 7.5%-7.75%, and revised to 7.625%.

Bankers say there is no real comparable for this deal, given that Road King has two distinct businesses in the form of toll roads and property development. Unlike all other Chinese property companies, Road King benefits from $133 million of recurring cashflow from its toll roads, while other toll road companies have no bonds outstanding at present.

Road King issued a seven-year deal in July 2004 (6.25%), when the company was rated investment grade, which was trading at 7.25%, but again this is not a suitable comparable. FridayÆs transaction came with a high-yield covenant package with a subsidiary guarantee, while the 2011s were issued with a high-grade covenant package.

The five-year non-call-one FRN was structured to coincide with the companyÆs plans to spin off the property business with an IPO in 2008, should markets be favourable. By selling off the property side, Road King will repay that debt, leaving only the bonds for the toll road business. Since Road King was once an investment-grade company before it ventured into the property market (when its business was toll roads only), the remaining bonds will likely benefit from an investment-grade upgrade.

Some sources on the buy-side say they had mixed feelings about the terms, viewing the exercise as investors paying a premium in the form of a reduced spread for the call option. Nonetheless, they say: "The China property market is too hot not to participate in these deals."

Although there is potentially some risk that Road King's IPO will not take place, other sources state that it is in the company's interest to repay an expensive, callable debt. The size of the property business and the maturity of the portfolio supports the likelihood of a spin-off.

If the bonds are indeed called after one year, investors will receive a three- point compensation. The FRN is callable at 103 after one year, stepping down to 102 in 2009, and 100 thereafter. It is believed that most of those who bought this paper viewed this purchase in the short-term, believing the IPO will take place and banking on that premium.

Road KingÆs current net debt-to-Ebitda is two times, but with $200 million of the proceeds to be invested in property (which takes a good year to start generating income), the real ratio should be viewed as between 3 and 3.5 times.

The company has been explicit in its intentions not to raise further debt after Friday's transaction.

Road KingÆs toll road projects encompass 19 expressways and highways across eight provinces. The company also has a 100% stake in six residential and commercial property developments, which total 1.5 million sqm. Late last year, the company invested in Suzhou Sunco, through which it acquired 100% of Phoenix City û a residential and commercial development project (1.4 million sqm). The company also acquired a 49% stake in Sunco Property (0.8 million sqm) as part of its bid to significantly enhance its property development business.
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