Sun Sage makes high yield debut

Korean auto parts manufacturer completes unusual structured transaction.

Sun Sage BV, a Netherlands-based non-operating holding company established to hold shares in Mando Corp, issued a $200 million 144a transaction on Friday. The five non-call three year deal was led by Deutsche Bank, JPMorgan and joint-lead Lehman Brothers.

Backed by a B+/Ba2 rating, the deal was priced at par with a coupon of 8.25% to yield 535bp over Treasuries. This represented the outer end of a pre-marketed range between 8% and 8.25%. Fees came to 1.625%.

Many investors are said to have viewed the deal as a cheap, leveraged play on Hyundai Motors and Kia Motor, from whom the group derived75% of its sales in 2003. Hyundai, for example, has a 5.3% December 2008 transaction outstanding, which was bid on Friday at 4.42% to yield 177bp over Treasuries, or 150bp over Libor.

The latter's deal has a one notch higher rating from Moody's (Ba1) and three notch higher rating from Standard & Poor's (BB+). The large rating differential on the S&P side is primarily the result of the structural subordination of the Sun Sage deal. S&P rates the group BB at the corporate level, but always assigns structurally subordinated deals a two notch lower rating.

In the same ratings category as the Sun Sage deal are credits such as Indonesia's PT Excelcomindo. The cellular operator has the same rating from S&P and a three notch lower rating from Moody's - B+/Ba2. On Friday, its recent 8% January 2009 deal was yielding 8.06% or 541bp over Treasuries.

The Sun Sage deal was structured to capture future dividend flow from Mando Corp, which is 76.3% owned by JPMorgan Capital Partners and UBS Capital. The two purchased the group in 1999 from bankrupt Halla group in 1999. The latter still has a 20% stake and despite no explicit ownership ties is still strongly connected to the Hyundai group, which founded Mando Corp in 1962.

To protect investors from the sale of Mando Corp, the deal incorporates a change of control put. But for investors, the main determinant was whether the dividend stream from operating company, Mando, to holding company, Sun Sage, will be able to comfortably cover interest payments on the bond over its five-year maturity.

The fact that proceeds are effectively being used to pay five-years worth of dividends up-front in the form of a shareholders' loan, is said to have unsettled some investors, who viewed the deal as a form of margin loan.

However, company supporters say the structure is commonplace in the US high yield market, but very unusual in Asia, where many still associate holding company structures with Indonesia's disgraced Asia Pulp and Paper (APP).

As a result, Sun Sage's deal was never going to attract a huge order book, but those accounts prepared to undertake detailed due diligence. It attracted investors looking for yield and Korean exposure with an added element of structural subordination risk. The final order book is said to have closed at the $240 million level, with participation from 32 investors.

By geography, the deal had a split of 52% Asia, 28% Europe and 19% US. Less than 10% of the total was allocated to Korea.

By investor type, asset managers took 71%, banks 26% and retail 3%.

In its pre-sale report, S&P said that Sun Sage BV's debt to capitalization has fallen from 66.4% in 2001 to 60.5% in 2003, while its EBITDA/interest coverage ratio has risen from 3.7 times to 7.9 times. Total debt at the end of 2003 amounted to Won115,465 million.

Over the same period, net income has risen from Won29,568 million to Won72,264 million. The company supplies brakes, steering and suspension systems for global auto manufacturers. In its report, S&P highlighted that the group's business profile is highly concentrated towards the Hyundai group.

However, it said that Mando is expected to reduce its sales to Korean auto manufacturers from 80% to 60% by 2007. But it also added that it may face challenges trying to break the market share of global competitors.

"A lack of products with unique value-added qualities also increases competition from other autopart makers," it says. "Mando's low cost position, however, gives it advantages compared with its stronger global peers."