CLSA's mezzanine fund finances China water project

CLSA Mezzanine Management has closed a $60 million financing transaction for Asia Water Technology, a Singapore-listed company that provides water purification and wastewater treatment solutions to mainland China.

The deal is structured with a mix of senior secured bonds with detachable warrants and junior convertible bonds. The book-building process has been a success as the deal is already sold out to Lucky Six, a wholly owned SPV of MezzAsia under CLSA Mezzanine Management, Indopark Holdings, and DBS Nominees (Private), a subsidiary of DBS Bank.

At present, 136 of ChinaÆs cities are facing severe water challenge. The problem is widespread and no longer limited to the north-eastern regions anymore. Residents of the Pearl Delta region in Guangdong province, a coastal metropolis and economic hot zone just across the border from Hong Kong, are already subjected to consumption limit imposed by the government. While water is still freely flowing in Hong Kong, the taps of the cityÆs northern neighbours sometimes see little more than a dribble for days on end.

The problem is further aggravated by the economic activities and rapid urbanization that is sweeping across the country. They in turn push up demand for clean water whilst polluting its supply. The pollution level is such that the population of Yangtze River delta region is advised against drinking, fishing or swimming anywhere near YangtzeÆs water by the government, as the water is deemed to be unsustainable for marine or human life.

If the government figures prove to be correct, a breath-taking 66 billion cubic meter of water will be consumed by Chinese citizens by 2030. Water treatment is no longer a luxury but a matter for survival if ChinaÆs quest for economic development is to be sustained. As the World Watch Institute points out in 2005, 400 out of 660 Chinese cities are suffering from contaminated ground water. A renewable source of water is necessary and the water industry has thus grown to be a $24 billion business.

Asia Water Technology is well poised in its surge of growth, says Stephane Delatte, managing director of CLSA Mezzanine Management in both Hong Kong and Singapore.

With key alliances with global technological leaders like Christ-Kennicott Water Technology, General Electric (Shanghai), and Seghers Keppel Technology Group NV, Asia Water is well grounded to engineer automated water treatment solutions for ChinaÆs power plants, industrial and municipal zones. Delatte added that opportunities like Asia Water are hard to come by and he expects it to generate solid returns over a long term in China.

When asked why CLSA chose Asia Water Technology, DelatteÆs reply was whimsical. ôWhy not?ö

In fact, the rationale for mezzanine financing for China is simple. Financing for upside returns, while maintaining a degree of control through the equity components.

"Straight-forward debt financing or equity investments through JV is difficult in China. The problem is with JV agreements, there is always a risk that the municipal governments will not honor it," says a senior European banker familiair with the deal.

"On the other hand, with debt financing, the regulations won't allow acquisition through debt with assets backed by the target entity, which make things quite hard. In the end, if a partnership turns sour, the shares are about your best bet to retain value. Of course the latest change in the regulations for debt issue is going to help a lot. But currently, mezzanine finance, though risky, is still a more superior way for investments."

One more deal will soon be closed in China, says Delatte. But his fund's investments are not limited to the environmental themes.

With an eye to robust cash returns, his portfolio spans from cosmetics companies in Korea to Indian textiles or chemical manufacturers, delivering higher yield than vanilla debt, while keeping an eye to risk that is lower than straight-forward equity. Convertible instruments under its mezzanine structures allow his fund to enjoy the best of both worlds, he says.