HONG KONG: Mainland paper producer Nine Dragons Paper Holdings has purchased $283-million worth of its outstanding senior notes.

The outstanding notes will be due in 2013 at an annual interest rate of 7.875 percent. The purpose of the offer is to reduce the principle amount of its outstanding debt and ongoing debt-service obligations, according to a company statement.

The company will fund the purchase with its internal resources. The maximum aggregate amount payable by the company under the offer is approximately $160 million.

The offer will expire March 9 at midnight, New York City time, unless the offer is extended. The notes are currently rated "BB minus" by Standard & Poor's and "B plus" by Fitch.

Boosted by the redemption of the notes, shares of Nine Dragons gained 2.31 percent, or HK$0.06, to close at HK$2.65 yesterday.

Ricky Tam, chairman of the Hong Kong Institute of Investors, said the company might make use of lower-interest financing to pay back its debts, given that mainland lenders recently lowered their mortgage rates.

"However, the company's financial status won't improve shortly," Tam said. "Given that the paper-manufacturing industry remains affected by the economic downturn, investors shouldn't purchase the stocks in a hurry."

Sun Hung Kai Financial Strategist Castor Pang said the outlook isn't good for Nine Dragons.

"Despite the restructuring of its loans, the company's gearing ratio remains at a high level," he said. "Also, high material costs are eating into the company's profit margins."

Nine Dragons posted a profit warning Jan 14 saying its earnings for the last six months of 2008 would be down considerably as a result of material prices rising and sales falling.

Capital magazine Basic Point earlier reported that Nine Dragons had entered into an agreement with financial institutions to raise the interest rate of a $2.6 billion syndicate loan by 100 basis points.

Analysts believed that the arrangement significantly increased Nine Dragons interest burden, estimating the company needs to pay another HK$100 million in interest a year.

BoCom International earlier gave a neutral rating to Nine Dragons. It said that the mainland paper manufacturing industry expanded its production capacity aggressively in the past, and the contraction in demand significantly hurt sales.

(HK Edition 02/10/2009 page16)