PanAsia Paper and Hebei Long-Teng Paper have closed a $215 million financing for a paper mill in Hebei province, China. The deal, on which DBS Bank is sole lead arranger and underwriter, is not a first for PanAsia, but a sign of growing confidence in Chinese assets. It also uses a mixture of dollar and Renminbi debt, underlining the fact that sponsors still like to see a mixture of the pricing China can offer, with the experience an offshore lead provides.

The genesis of the plant lies in plans by the People's Daily newspaper to find a joint venture partner to create a plant for its newsprint needs. At the time the irony of one of the official organs of Chinese Communism buying its paper from a capitalist producer was too jarring, and the newspaper abandoned the project in 1999. Abitibi of Canada, with which it had been negotiating, continued to examine the project.

Since then Abitibi has joined forces with its nearest competitor, Norway's Norske Skog, to create PanAsia Paper, the regional leader outside Japan. PanAsia has a solid record in operating paper mills in China and South Korea, among other countries. Its parents have been constructing mills for decades. And the province of Hebei, which circles the capital Beijing, still wanted to build the plant.

The presence of the paper as a partner, while desirable politically, was not important as a source of business since paper customers rarely sign long-term contracts. With Hebei as a partner, the 30-year Hebei PanAsia Long Teng Paper Co. Ltd. concession signed on 10 September 2003. Hebei functions as a political promoter, and should ultimately provide some support to the project's demand and supply metrics.

At the same time as the signing of the agreement, PanAsia appointed DBS Bank as lead arranger for the project's financing. DBS, while, like PanAsia, based in Singapore, beat out nine competing banks and is running the deal through its Hong Kong office. According to Ricardo Cheung, corporate treasurer at PanAsia, the deal had been in the works for several months. Nevertheless, the speed with which launch has been achieved is impressive.

PanAsia, however, does have a solid following in the bank market, one that should make selling the deal, and certainly made closing the deal, considerably easier. It has borrowed corporate money, and has put together a financing for a mill in Shanghai. "We've successfully been to the markets three times, and refinanced our Shanghai project in February last year," notes Cheung.

The mill has a planned capacity of 330,000 tonnes per year of newsprint, and will be one of the largest and most efficient of its type in the region. It will use 100% waste paper, and sell into the Chinese market. It will certainly have the lowest delivered costs in the Chinese market, despite using foreign waste paper to supply two thirds of its needs.

The plant's suppliers are Metso of Finland, Hansol EME of Korea - once a potential sponsor - and China Haisum Engineering. Roughly 70% of the mill's costs will be dollar denominated, with the remainder sourced in Renminbi (RMB). This split is roughly mirrored in the denomination of the debt.

The $215 million debt consists of a dollar term loan tranche of up to US$143 million, a RMB term loan tranche of 432 million (or $52 million equivalent), and a RMB revolving credit tranche of 166 million. The term loans have a tenor of eight years, while the revolver has a maturity of 2006, although it has a two-year term-out option.

The deal does have substantial limited recourse to PanAsia, the 65% owner of the project. PanAsia has provided a completion guarantee for the plant, reflecting the fact that it has substantial experience, and there are few contractors, if any, capable of taking on completion risk. The project company will have to maintain a DSCR of 1.2x, and there are restrictions on dividend distributions to the sponsor.

Nevertheless, the fundamentals of the deal are strong. China's demand for newsprint stood at 1.8 million tonnes at the end of 2002, up from 1.15 million in 1998. Demand is forecast to grow at 8% per year, up to a potential 3.2 million in 2010. Tentative steps towards creating a market in information lie behind much of this growth - players like the People's Daily have little choice now but to buy capitalist newsprint. It helps, however, to sell to strong, or at least politically well-connected, customers.

The plant's competitive position is also solid, although there have been periodic rumblings from the government that the industry is in need of restructuring. It is likely that the closure of competing paper mills can only have a beneficial effect upon the Hebei plant in the medium term. And, as Hebei government persuades the local populace to recycle more paper, the plant will rely less and less on imported supplies. The plant is compliant with ISO 14000.

DBS Bank, while the admin agent, through its Shanghai branch, will not be lending on the RMB tranche, since Hebei banking law forbids foreign banks to do so. But the two tranches benefit from common terms, and Chinese bank take-up is likely to be strong. International banks will also be keen to lend on the offshore tranche, although here again Chinese players will be very competitive.

Hebei Pan Asia Long Teng Paper Co. Ltd.
Status: Closed 10 September, in syndication
Size: $330 million
Location: Hebei province, China
Description: 335,000 ton paper mill
Sponsors: Hebei government, PanAsia Paper
Debt: $215 million equivalent, in dollar and Renminbi tranches
Arranger: DBS Bank
Tenor: eight years
Pricing: 110bp over Libor
Lawyers to the borrower: Herbert Smith (international), Grandall Legal Group (Chinese law)
Lawyers to the lenders: Allen & Overy (international) and Jingtian and Gongcheng (local)