Road King Pays Record Dim Sum Yield Yet Saves: China Credit

Road King Infrastructure Ltd., the toll-road operator with 15 projects spanning seven Chinese provinces, paid the highest yield on record to sell yuan bonds in Hong Kong and still saved on what it would have paid borrowing in China or in U.S. dollars.

Road King sold 1.3 billion yuan ($198 million) of three-year notes yielding 6 percent, according to a person familiar with the offering. While that is 0.75 percentage point more than the record 5.25 percent paid this month by PCD Stores Group Ltd., it’s less than the 8.6 percent that Road King’s $200 million of May 2014 notes yielded on Feb. 18, ING Groep NV prices show. Three- to five-year money in China costs 6.45 percent, People’s Bank of China data show.

“China’s infrastructure spending needs are huge, and in the context of funding costs the interest on this bond issue is lower,” Prakash Gopalakrishnan, a credit strategist at Royal Bank of Scotland Group Plc, said in a telephone interview from Singapore. “Road King has an acceptable credit profile within the high-yield universe, and while there are better options for U.S. dollar investors, this is aimed at those who are long Chinese yuan in Hong Kong.”

Road King is reaping the benefits of raising debt in Hong Kong, where interest rates are pegged to the dollar. It’s also paying a lower yield than it would in the U.S. market for sub-investment grade debt, as the world’s fastest-growing major economy expands its 65,000 kilometers of expressways to accommodate the more than 18 million cars added last year.

While China has raised borrowing cost three times in four months to combat inflation, the Federal Reserve is keeping rates close to zero to aid economic recovery.

Hopewell, Caterpillar

Speculative-grade corporate debt yields in the U.S. have averaged 7.52 percent this year, according to Bank of America Merrill Lynch’s U.S. High Yield Master II Index, which tracks the performance of more than 2,000 dollar-denominated securities. Speculative-grade, or junk, bonds are rated BB+ or below by Standard & Poor’s and Ba1 or lower by Moody’s Investors Service.

Hopewell Highway Infrastructure Ltd., controlled by Hong Kong billionaire Gordon Wu, paid a 2.98 percent coupon when it raised 1.38 billion yuan from two-year notes in July, according to data compiled by Bloomberg. Peoria, Illinois-based Caterpillar Inc., the world’s biggest maker of construction equipment, sold 1 billion yuan of 2 percent December 2012 notes last year. Those securities rose to a high of 101.7 cents on the dollar to yield 1.031 percent as of 12:34 p.m. in Shanghai, according to UBS AG prices.


Road King’s latest sale of bonds will help repay loans, fund working capital and finance the acquisition of expressways, including a potential project in China’s Shanxi province, according to a company statement filed with Hong Kong’s stock exchange Feb. 17.

Arien Sy, an investor relations official, declined to comment when contacted by Bloomberg News last week, saying the company was prevented from discussing the matter while marketing the bonds to investors.

Almost 40 percent of Premier Wen Jiabao’s $586 billion economic stimulus package in 2008 went into infrastructure spending as China strives to build 3 million kilometers (1.86 million miles) of expressways and highways by 2020, according to Chicago-based research firm Thomas White International Ltd. The nation’s 65,000 kilometer expressway network is the second-longest in the world after the U.S., the company wrote in an August 2010 report.

Sales of new cars in China totaled 18 million last year and may grow by as much as 15 percent this year, figures from the China Association of Automobile Manufacturers show.

Yuan Expectations

Yuan deposits in Hong Kong rose fivefold in 2010 to a record 314.9 billion yuan as the city’s residents, who are restricted from investing directly in mainland China, bet on a currency that is forecast to gain 4.3 percent this year, the most among those of the so-called BRIC emerging economies.

India’s rupee is expected to gain 3 percent, while Brazil’s real and Russia’s ruble are forecast to fall, according to median forecasts in Bloomberg surveys.

The yuan advanced today to a 17-year high on speculation policy makers will let the currency gain to help tame inflation which reached 4.9 percent last month. The yuan rose as much as 0.1 percent to 6.5658 per dollar earlier today, the strongest level since China unified official and market exchange rates at the end of 1993, according to the China Foreign Exchange Trade System. The spot rate traded at 6.5664 per dollar as of 12:45 p.m. in Shanghai.

Sovereign Risk

Five-year credit-default swaps on Chinese government debt have risen 5 1/2 basis points this year on concern that the fight to curb inflation may threaten growth that’s averaged about 10 percent over the past five years. The central bank raised reserve requirements for lenders on Feb. 18 just 10 days after boosting interest rates. The contracts fell 2 1/2 basis points to 73 basis points last week, CMA prices in New York show.

Credit-default swaps are used to insure debt against default and traders use them to speculate on credit quality. An increase suggests deteriorating perceptions of creditworthiness and a drop shows improvement. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

The yield on China’s 2.68 percent government bond due in November 2013 fell five basis points to 3.348 percent last week, Chinabond prices show. One-year interest-rate swaps, or the fixed cost needed to receive the floating seven-day repurchase rate, rose eight basis points to 3.93 percent last week, according to data compiled by Bloomberg. They were four basis points higher at 3.97 percent as of 12:56 p.m. in Shanghai, the data show.

Full Impact

“With a low coupon rate relative to dollar offshore bonds, Road King’s yuan bonds will lower the company’s funding costs and improve its debt maturity profile,” said Peter Choy, a senior vice president at Moody’s. “The full impact of the lower interest rate and debt repayments will be reflected in 2012.”

The Hong Kong-listed company has total borrowings of HK$8.86 billion ($1.1 billion) and cash of HK$5.69 billion, according to its Feb. 17 statement. The stock has gained 23 percent in the past 12 months, compared with a 15 percent increase in Hong Kong’s benchmark Hang Seng Index.

With a dividend of 30 Hong Kong cents a share forecast by Bloomberg data, its gross dividend yield will be 7.14 percent compared with 4.29 percent for Hong Kong-listed Jiangsu Expressway Co. and 2.81 percent for Shenzhen Expressway Co.

“Management tries to adhere to a progressive dividend policy which means the dividend in absolute terms should increase over time,” Kaiser Choi, an analyst with South China Research Ltd., said in a phone interview from Hong Kong. “I prefer the equity to debt as share prices are pretty depressed and now is a good time to accumulate if you are a long term investor.”