Country Garden sells $550 million of high-yield bonds

What looked like a disappointing capital management exercise on Wednesday when Country Garden announced that less than 20% of its outstanding convertible bond had been tendered by the holders, turned into triumph last night as the company managed to sell $550 million of new high-yield bonds.

The main purpose of the seven-year bond was to fund the CB tender, which, as it turned out, could have been achieved with a much smaller issue size. However, given the favourable market conditions for new issuance and the strong investor appetite for quality names, the Chinese real estate developer chose to go for a benchmark-size issue even though the CB tender attracted only $114 million worth of bonds, or about 18.1% of the outstanding amount. The excess money raised puts the company is in a good position to buy back the remaining CBs when they become puttable in February next year.

The outcome of the tender would have been disappointing for the company, which likely hoped to buy back a lot more of the renminbi-denominated, US dollar-settled CBs, which before this exercise had a face value of Rmb4.314 billion ($630 million). But the reluctance to tender can also be viewed as a sign that investors want to hang on to their exposure to the Country Garden name and equity story. The pickup in yield terms for the investors who chose to keep the CBs is small at just below one point -- the put price is 111.997, while the tender was done at a fixed price of 111% of face value plus accrued interest -- but apparently this was enough for them to hold on to the bonds for one more year.

One source noted that Country Garden is one of the biggest Hong Kong-listed real estate developers in China and the lack of CBs that offer a similar exposure may have contributed to the tepid interest for the tender, which was offered at a premium of 2.5 points versus the current market price and about 2.75 points versus the accreted value of the CB. The latter refers to how much of the back-ended yield that has already been earned. The CB carries a coupon of 2.5% and comes with back-ended yield-to-put of 6.2%.

The attraction of the name was clearly evident when it came to the high-yield bond issue as well. The deal launched early yesterday morning (Hong Kong time) after a four-day roadshow and was priced and allocated before midnight. In spite of the quick execution, the deal attracted $4.1 billion of demand from 210 investors and the price was fixed at the tight end of guidance, resulting in a minimal new issue premium compared with the company's  own outstanding 11.75% five-year deal, which was issued in September last year and expires in 2014.

The initial guidance, which was issued during the Hong Kong morning session, was for a yield in the 11.625% area, but after the order book reached $2 billion in the early afternoon, that was tightened to a range between 11.375% and 11.5%. The price was eventually fixed for a yield of 11.375%. The bonds pay a coupon of 11.25% and were re-offered at 99.408.

At the time of pricing, the outstanding five-year deal bond was trading at a yield of about 10.125%, which, according to a banker, implies a yield of 11.125% when adjusted for the longer maturity of the new issue. Consequently, the new issue priced just 25bp wider than the existing deal, which must be considered quite tight.

Demand was clearly driven by the fact that investors were already familiar with the name following its debut issue in September, but some observers also suggested that Country Garden may have benefitted by moving quickly after the Easter holidays, thus beating several other Chinese developers to the punch. Three of its peers -- Evergrande Real Estate, Glorious Property Holdings and Kaisa Group Holdings -- are currently marketing high-yield deals of their own and more are expected to follow as the mainland banks cut back on their lending and issuers try to tap into the current low interest rates before the first US tightening this cycle.

About 64% of the Country Garden bonds were allocated to Asia-based investors, while 20% went to the US and 16% to Europe. In terms of investor type, asset managers and funds took 69%, private banks 18%, banks 6%, insurance companies 4% and corporate and others 3%.

Moody's issued a preliminary rating of Baa3 to the Reg-S/144A bonds and Standard & Poor's gave them a AA- rating. Moody's rating is one notch lower than Country Garden's Ba2 rating. The difference reflects the risk of legal and structural subordination, as subsidiary and secured debt will still comprise more than 20% of the company's total assets, the rating agency said. The negative outlook also reflects the need for the company to overcome the execution risk on its lower profit margin projects outside Guangdong province and its somewhat weak credit metrics for the rating level.

Goldman Sachs and J.P. Morgan were joint arrangers of both the CB tender and the high-yield bond.