Second time lucky for Chaoda

China''s largest integrated fruit and vegetable producer completes a debut high yield bond.

Chaoda Modern Agriculture raised a slightly increased $225 million yesterday (February 1) via a five-year deal led by Credit Suisse First Boston, Deutsche Bank and Merrill Lynch. Pricing came at the tight end of revised guidance after the deal accumulated an order book of $1.3 billion.

Terms were fixed on an issue price of 98.985% and coupon of 7.75% to yield 8% or 430bp over Treasuries. Fees are 1.6%.

The company initially set out with a $200 million target and indicative pricing around the 8.5% mark.

The most obvious pricing comparable is fellow China mid cap Asia Aluminium, which has the same Ba3/BB rating as Chaoda. In December, the group issued a slightly longer seven-year bond, which was trading yesterday at 7.97%.

Specialists say the need for a slight premium to Asia Aluminium can be attributed to residual concerns over the loss of the company's auditor PricewaterhouseCoopers in July 2003. The company told investors it decided to part company with PWC because it was unhappy paying the large feeds demanded by one of the big four auditors. PWC has never commented on the matter.

On a stand-alone basis, specialists believe the company merits an investment grade rating. But as one comments, "This is a private sector, mid-cap company from China, which has previously had a shadow cast over it. Should the company be proved right then any lingering corporate governance concerns will fall by the wayside and this bond will perform spectacularly."

Slightly higher up the food chain, for example, Chinese mid caps Panva Gas and Sino Forest are both trading in the low 7% range, with Panva quoted yesterday at 7.15% and Sino Forest at 7.03%.

A total of 188 accounts participated in the deal, of which 75 were from the US. There was said to have been extremely little demand from the Chinese banking sector, which typically only supports government related or blue chip credits.

"Companies like Chaoda are ill served by the domestic banking and will increasingly turn to the high yield markets for funding," says one specialist. "The success of this deal should be very encouraging."

By investor type, banks took 40%, asset managers 35%, insurance companies 10% and other (including private banks and hedge funds) the remaining 15%.

Over the past two years, Chaoda has worked hard on its investor relations and is considered one of the most dynamic mid caps listed on the Hong Kong exchange. In FY June 2004, it recorded revenue of $230 million, up 25% year-on-year and EBITDA of $125 million. Post bond issue the company will run a debt to EBITDA ratio of less than two times. As of June 2004 it was in a net cash position of $114 million.

It previously tried to launch a high yield bond in the summer of 2004 when markets were far less receptive.