In a year defined by the beginnings of a more sustainable Asian high-yield debt market, it is perhaps only fitting that what is likely to be the final deal of 2005 should come from one of Asia's lowest rated deals ever - a $250 million offering by B- rated pulp and paper producer Advance Agro. From the beginning, the ABN AMRO and Deutsche Bank led deal was considered a difficult sell given the recent volatility in the high-yield market and a spate of pulled deals.
In order to compete with a domestic bank facility offered to Advanced Agro by its creditors, the leads opted to introduce a call option into the bond offering. Initially marketed to investors as a bullet transaction with a low to mid 11% indicative range, the leads restructured it into a seven-year non-call four-year offering and revised guidance to 11.5% to 11.625%. As the deal progressed through roadshows, they were able amend guidance down to 11.25% to 11.50%.
Final pricing came early yesterday morning (December 13) at 98.81% on a semi-annual coupon of 11% to yield 11.25%, equivalent to 672.4bp over US Treasuries. The notes are callable from year four at 105.625%, year five at 102.8125% and year six at par. Fees are 2%.
The deal assembled an initial book north of $750 million. However this thinned down to around $600 million following the revisions. Although no accounts were lost, some investors opted for smaller allocations.
In total 69 accounts were allocated paper, with Asian investors accounting for the majority of the final book at 58%. Singapore investors bought up 33% and Hong Kong investors took the remainder of the Asian distribution. Euorpe bought 16% and US accounts took 26%.
In terms of investor type, fund managers bought 66% of the total book, with banks buying 15%, retail investors accounting for 7% and others the remaining 12%.
Because of the rarity of high-yield Thai debt, comparables are rather thin on the ground. Bankers cite higher rated G Steel's October 11% 2010 non-call three-year deal rated B+/B1 deal and Gajah Tunggal's 10.375% July 2010 bullet deal rated B/B2. Those deals were quoted yesterday at 11.18% or 673bp over US treasuries, and 11.68% or 722bp over, respectively. On a like for like basis, Advance Agro has priced inside of their established low single B curve.
Heading into the deal, market specialists believed Advance Agro would be a particularly tough sell as the company is in a technical default on its outstanding Yankee bonds. Earlier this month local rating agency TRIS issued a credit alert with a developing designation after the company committed a technical default under the indentures of its $111.35 million 13% 2007 bonds.
The agency said this could lead to liquidity problems and trigger a cross default under a Master Override Agreement the group has with its local banks. Advance Agro is currently in negotiations to re-finance up to Bt14 billion in debt.
The B- rated company (Standard & Poor's) was one of the last Asian corporates to execute a transaction before the Asian financial crisis completely shut the debt markets. Ironically, its November 1997 deal had a launch spread of 911bp over Treasuries.
