Shimao Property sold an $800 million seven-year bond that is callable in year four on Tuesday evening, the first Chinese developer to tap the Asian high-yield market since the Kaisa complex plagued the sector.
The developer priced its latest Reg S-only bond at 8.375%, which is 37.5bp tighter than its initial price guidance area of around 8.75%, according to a term sheet seen by FinanceAsia. It is also at the tighter end of the final price guidance range.
Shimao’s offering has expected ratings of Ba3/BB-/BB+, and the proceeds will be used to refinance — in part or whole — the company’s $350 million 11% bonds maturing in 2018. Excess proceeds will be used to finance new and existing projects and for general corporate purposes, sources familiar with the matter said.
The latest developments in Kaisa’s saga have disappointed investors, sending jitters throughout the high-yield sector. The Chinese developer sold four prime property projects to Sunac China for Rmb2.3 billion ($369 million) over the weekend, giving the company some cash to keep it afloat but dealing a blow to offshore bondholders hoping for a white knight.
Previously, media reports had said that Sunac would buy a 49.3% stake in Hong Kong-listed Kaisa, fuelling hopes that it would rescue the troubled developer.
As a result, Kaisa’s bonds opened the week 15bp down and ended Monday 10bp lower. On Tuesday, the notes dropped a further 5bp, according to Bloomberg bond data.
Nonetheless, this did not deter Shimao from tapping the global capital markets. In fact, the developer's bond issuance is seen as positive as it would help maintain its debt leverage at appropriate levels in the next 12 to 18 months, says Moody’s in a note on Tuesday.
"The proposed bonds will further strengthen Shimao's liquidity position, help fund its business expansion, and lengthen its debt maturity profile," said Franco Leung, senior analyst at Moody’s, adding that the company’s revenue-to-debt ratio for the next 12 to 18 months will be maintained above 90%.
This additional liquidity could also help to pre-fund the company's land acquisitions and repay some existing debt in order to reduce average interest costs, Leung said.
Shimao's offering received a total orderbook of $5.6 billion from over 300 accounts, with 73% of it going to Asian accounts and the remainder to Europe.
Fund managers subscribed to half of the notes, followed by private banks 42%, banks 4% and others 3%.
Shimao Property is among China’s largest developers, with a focus on residential properties in upper-tier cities and a high quality investment portfolio — including hotels, office and retail properties — which contributed to around 3% of the company’s revenue in the first half of 2014.
In June 2014, Shimao’s land bank stood at 36.9 million square metres, across 42 mainly upper-tier cities across eastern and northeastern China.
Comparables
The nearest comparables for Shimao’s latest offering include its existing notes maturing in 2021 and callable in January 2017. The paper were trading at a yield-to-worst (YTW) — the lowest yield an investor can expect when investing in a callable bond — of 7.95% prior to announcement, according to a source familiar with the matter.
Other comparables include Country Garden’s outstanding paper expiring in April 2021 and January 2023, callable in October 2017 and January 2018 respectively. They were trading at a YTW of 7.95% and 8.35%, added the source.
After taking into consideration the one-year extension from Country Garden’s curve, the fair value of Shimao’s deal would be around 8.2%, suggesting a healthy new concession of 55bp.
“[This] is not surprising given this is the first high-yield China property deal this year,” said a Hong Kong-based credit analyst. “With Shimao being among the highest quality high-yield issuers, we still consider [the] deal attractive if it prices at 8.45% or better, which still leaves some buffer against weakness [in the industry].”
Shimao — 65% owned by its founding chairman, Hui Wing Mau — was incorporated in 2004 and listed on the Hong Kong Stock Exchange in 2006. Its current market capitalisation is HK$56 billion ($7.3 billion).
Goldman Sachs, HSBC, Standard Chartered and UBS were the joint global coordinators and bookrunners of the transaction. Other bookrunners include JP Morgan, Morgan Stanley and CLSA.
