Chinese property developer Sunshine 100 Holdings raised $200 million from its debut convertible bond sale on Thursday, turning to equity investors to partially refinance an existing 12.75% vanilla bond that falls due next year.
The B-/B- rated company's switch from straight debt to convertible debt financing came as a surprise to some bankers. Asia's sub-investment grade rated companies have shunned the Asia ex-Japan convertible bond market in recent years, relying on conventional bonds and bank loans to hit their funding targets.
That gave the five year deal — puttable and callable after three years — a scarcity value that may have helped push it over the finish line. Sunshine 100’s new deal appealed to those who are willing to take more risk than typical convertible bond investors but who are only interested in investing in companies that are rated by international rating agencies, said bankers.
Sunshine 100’s Reg-S bond was marketed with a fixed 6.5% coupon but paid a 8.5% yield to maturity. The deal came with a put at 106.67% of par, and a redemption at 112.15% of par. That meant the deal offered a higher yield than any outstanding CBs from Asia ex-Japan.
In the last two years, there have only been two convertible bonds that offered a coupon of more than 5%: Shui On Land’s $225 million 7.5% perpetual and Hsin Chong’s $100 million 6% deal last year. But both issuers were unrated, and neither offered the standard five-put-three structure that Sunshine 100 offered.
The conversion premium was fixed at 10% over Sunshine 100’s HK$3.3516 five-day average price, translating to a conversion price of HK$3.69. The bond also features full dividend protection.
The deal was launched with a flexible size, albeit capped at $200 million. Two Chinese anchor investors gave the deal early support, meaning it was half covered at launch. That helped the issuer achieve the maximum deal size with incremental demand as the book built after market close on Thursday.
A buyside source said the deal was primarily an outright play because the underlying stock was highly illiquid, trading less than one million shares on a three-month average per day. With the stock mostly trading between HK$3 and HK$4 since the firm’s initial public offering in 2014, it is also not volatile enough for hedge funds to deploy convertible arbitrage strategies, he said.
The final allocation was heavily skewed towards outright investors, but a couple of hedge funds were allocated about 10% of the deal, according to a banker familiar with the trade. In the end, the order book was slightly oversubscribed.
The company should be pleased with the outcome since it is able to cut its funding cost by almost half compared to its privately-placed, $215 million 12.75% dollar bond issued in 2014, said the banker familiar with the trade.
The three-year bullet bond, due August 2017, was quoted at a bid/ask of 105.9/106.7 to yield 7.1%, according to bond traders.
Some convertible bond specialists used a credit assumption of 900bp to 1000bp for the Hong Kong-listed property developer, meaning the company is saving as much as 350bp for each of the first three years by issuing convertible instead of straight debt.
For investors, the bond is a rare exposure to high-yield credit in the convertible bond space. They may also have welcomed the chance to enjoy a 10% conversion premium, which is very low by Asian standards.
The deal also offered a rare treat for bankers working on it. It was the first time a syndicate comprising only Chinese banks had run a convertible bond offering.
Guotai Junan Securities was the sole global coordinator of the bond sale. ABC International, Haitong International, Orient Securities and Zhongtai International were joint bookrunners.
Leading by example
Sunshine 100’s success may entice other Chinese property developers to tap the offshore convertible bond market for funding, according to an equity-linked banker away from the transaction.
Mainland property developers seldom raise convertible debt because most of them do not have real dollar funding needs. There were hardly any convertible bond issuers from the sector in recent years because of a low onshore funding cost. It has also become more difficult to remit offshore money into the country as Beijing tightens its grip on capital flows.
Apart from Shui On Land, the only Chinese developer to have tapped the offshore equity-linked market was China Overseas Holdings, which printed a $1.5 billion exchangeable bond late last year. The deal was exchangeable into shares of Hong Kong-listed subsidiary China Overseas Land & Investment.
But the situation could change soon. Some Chinese property developers, particularly small- to medium-sized firms, are finding it hard to locate onshore financing.
Paul Au, head of Asia debt syndicate at UBS, estimated that Chinese property developers will be a major force of Asia’s high-yield bond issuance over the next two years.
Au, speaking at a UBS conference on Thursday, said that bonds with three- to five-year tenor that pay 6% to 8% yield could be most popular among fixed-income investors. Most of these deals will end up in the conventional bond market. But the supply with give CB bankers a potential source of revenues.
Repeated convertible bond issuers like Country Garden and Agile Property are likely candidates to tap the offshore market again, said the equity-linked banker.
