What a difference a few months make to the equity-linked market.
Two Chinese real estate developers with similar credit profiles raised a total of $555 million through short-dated convertible bond sales on Monday, extending a dramatic streak of equity-linked issuance in Asia ex-Japan since the beginning of the year.
Both Future Land Development and Powerlong Real Estate found success for their respective bond offerings on the back of the property sector’s strength in the equity market, enabling them to upsize their deals in full.
In doing so, they extended a January hot streak for the equity-linked market. Equity-linked issuance had been in the doldrums as recently as late last year, with a drought of issuance. Yet Future Land and Powerlong’s new deals took Asia ex-Japan equity-linked issuance to $4.5 billion in January alone – already more than half of last year's full-year figure of $7.3 billion.
With the market quickly turning around equity-linked specialists are hoping for a strong year of issuance on the back of the prevailing stock market strength and a gradual decline in investor appetite in the straight bond market as US interest rate rises.
The head of equity-linked products at one bulge-bracket investment bank told FinanceAsia the market was on course for its best year since the 2008 financial crisis, or even further.
“The bull market of equity-linked products typically occurs either at the trough of a stock market cycle or when the stock market is doing extremely well,” the investment banker said. “Clearly we are in a strong market where companies are more willing to raise equity-linked financing.”
For investors with less risk appetite, convertible and exchangeable bonds also serve as a good alternative to investing directly in the red-hot stock market.
Property plays
Future Land, a mid-cap residential developer based in Shanghai, raised HK$2.35 billion ($300 million) from its one-year convertible bond deal after fully exercising a $50 million upsize option. Powerlong, a small-cap commercial developer founded by Macau tycoon Hoi Kin Hong, sold $255 million worth of bonds that included a $50 million greenshoe.
Their successes reflect investors' apparent confidence that the Chinese real estate sector will continue to trade high after last year’s rally, which was largely driven by rebounding sales and expectations local governments will relax home sales restrictions.
Future Land was one of the biggest gainers in the sector after shares soared 415% since the beginning of last year, while Powerlong lagged behind with a 93% gain during the same period. Both outperformed the broader Hong Kong market, which increased about 50% since the start of 2017.
Besides the strong market backdrop, one source familiar with the situation attributed the demand to the absence of high-yield Chinese property names in the equity-linked space. In particular, the two deals include back-end yields of at least 2.25%, making them stand out in a market flooded with paper that pays no coupon.
Meanwhile, by turning away from debt funding into equity-linked financing, the two developers were able to capitalise on their stock market strength. A trend was already under way of developers raising equity instead of debt, with recent examples such as Sunac’s $516 million share placement and Country Garden’s $3 billion equity combo earlier this year.
Comparison
Ba3/BB- rated Future Land’s $300 million deal was slightly more appealing according to investors compared to Powerlong, which was rated one notch lower at B1/B+.
In particular, Future Land’s semi-annual coupon payment was more investor-friendly compared to Powerlong’s zero-coupon deal, in which bondholders will only be able to collect the interest payment when the bond matures.
Meanwhile, Future Land’s higher 30-day historical volatility at 76.7% also made its option value higher than that of Powerlong at 36.9%.
These differences were reflected in the final pricing of the two bonds, with Future Land’s deal priced slightly tighter.
Future Land’s 363-day note was marketed with a 1.5% to 2.5% coupon and a conversion premium of 25% to 28%. The final terms were fixed at 2.25% coupon and a 28% conversion premium, suggesting that the issuer was willing to pay a higher coupon in exchange for a higher premium. The strike price was set at HK$10.496.
Powerlong’s new deal of the same tenor was pitched at a 2% to 2.75% back-end yield and a 22.5% to 30% conversion premium. The developer eventually priced the bond at the investor-friendly end of the yield range at 2.75%, while the conversion premium was set towards the wide end at 23.5% to give a HK$5.4463 strike price.
Bondholders are effectively compensated 50 basis points of interest payment for Powerlong’s weaker credit and lower volatility.
It was worth noting that investors appeared to have been unfazed by Future Land’s $200 million top-up share placement just two weeks earlier, which was conducted at an 8.86% discount to market price at $5.86 per share.
This means that excluding the coupon payment, Future Land’s convertible bond subscribers were effectively getting the shares at a 79% premium to those that subscribed in the share placement.
Joint bookrunners of Future Land's bond were Deutsche Bank and Citigroup.
Joint bookrunners of Powerlong's bond were Bank of America Merrill Lynch, Credit Suisse, HSBC and UBS.
