EM CREDIT SUPPLY: China Water Affairs Group: New USD mandate Fair Value
(CWAHK, Ba1/BB+/NR)
New Issue: $200m max, 5Y
IPT: 6.375% area
FV: 6.2% area
China Water Affairs Group is coming to the market with a new USD 5NC3 blue note, in which DEG-Deutsche Investitions-und Entwicklungsgesellschaft has placed a large lead order of USD35m. The maximum size is set at USD200m. The use of proceeds will be to refinance existing debt, including the USD 26's, and general corporate purposes.
The company focus is water supply, in which the city water supply business (64% of revenues) serves around 30 million people, managing water pipelines 151,000km long. City water supply projects are well diversified in various provincial cities and regions across China.
According to Moody's, structural subordination risks are manageable at the holding company, with over 100 operating subsidiaries with each one operating one project or concession. Diversification mitigates any material claims on cash. The expectation is that operating subsidiary debt as a proportion of group debt will shrink over time.
Operational risks focus on availability of water, delays in the ability to pass on rising costs, and changes to the regulatory regime. Tariff increases from local authorities are expected to support margins.
Peers include aluminium producer China Hongqiao (HONGQI, NR/BB-/BB+), ENN Clean Energy (VEYONG, Baa3/NR/BBB), Manilla Water (MWCPM, NR), as well as Li & Fung (LIFUNG, Ba2/BB/BB).
In terms of fair value, we focus on the similarly rated China Hongqiao curve, we add 20bp premium for reduced liquidity (lead order, small deal size). Subordination risks, lack of business diversification and reliance on local authorities for price hikes adding another 20bp. All in we see fair value around z+285-295bp area ( 6.1-6.2% area).
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Fig 1 : CNH/JPY 2H Chart
Source: MNI - Market News/Bloomberg Finance L.P
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