China Evergrande Group caused a massive selloff in dollar bonds out of the Chinese property sector on Tuesday after the debt-laden developer took itself to the market to raise $1.8 billion from a triple-tranche bond offering that priced at a hefty premium to its existing paper.
Bond traders said that B+/B1/B+ rated Evergrande’s outstanding bonds were also hit by the new issue. They traded down some 160bp to 230bp during Asian trading hours on Tuesday and extended last week's losses.
Other single-B property names like China South City and Fantasia were among the major casualties, seeing their outstanding bonds shed as much as 1%. Investment grade names like Shimao and Country Garden were also affected, bond traders told FinanceAsia.
The damage from Evergrande’s new issue has even spread across the broader Asian high-yield market as real estate and industrial names fell by an average of 50bp to 75bp on Tuesday alone.
The turbulence came in the wake of Evergrande's plans to issue US dollar bonds that yield as much as 13.75% - the highest ever paid by the developer in the offshore bond market. The triple-tranche offering featured an 11% November 2020 tranche, a 13% November 2022 tranche (callable November 2020) and a 13.75% November 2023 tranche (callable November 2021).
Overall the triple-tranche bond was offered with a hefty new issue premium compared to Evergrande’s three-tranche bond issue last year, which has yields of 6.25%, 7.5% and 8.75% and a maturity profile of four, six and eight years.
SECONDARY MARKET PLUNGE
Evergrande was forced to pay such a high premium because the prices of its outstanding bonds have dropped to record low levels, and spreads have widened massively in the secondary market.
For instance, before the new deal was announced, the developer’s existing 7% March 2020 bonds were trading at 97.2 to yield 9.2%; its 8.25% March 2022s were at 90.1 to yield 11.9%; while the 7.5% June 2023s were indicated at around 83.3 to yield 12.3%.
That suggests that Evergrande’s new two-year, four-year and five-year deal priced at a yield pickup of 1.8%, 1.1% and 1.45% respectively, to its outstanding bonds of the same maturities.
Still, a new issue premium of more than 1% has rarely been seen in the context of Asian high-yield debt. This suggests that investors have broader concerns about Evergrande’s debt profile and its business outlook as Beijing tightens its grip over property prices.
The Shenzhen-headquartered developer is sitting on as much as Rmb166.6 billion ($23.9 billion) of outstanding debt, the second-highest among Chinese property developers behind China Resources Land. And US dollar debt accounts for nearly half of its debt pile.
Evergrande said that proceeds from the bond sale will be used to finance existing debt, which sparked concerns that the developer is creating a vicious cycle by rolling over cheaper short-term debt with long-term debt that costs much more.
REDUCED EXPOSURE
Above all, Evergrande's costly new issue suggests that amid rising US interest rates and concerns about global economic instability, Chinese property developers are no longer able to raise cheap offshore debt.
To alleviate market concern, Evergrande chairman Hu Ka Yan announced that he would subscribe to $1 billion worth of the new issue before the bookbuild opened on Monday morning. That was intended to provide an underlying support to the bond sale, but some investors thought otherwise.
“It is unbelievable that the chairman is buying the bulk of the deal because no one knows whether he will sell in the aftermarket,” one bond trader told FinanceAsia.
Distribution statistics show that the new deal attracted $2.32 billion of demand across the three tranches, including $900 million for the two-year, $770 million for the four-year, and $650 million for the five-year bond.
That implies that Evergrande was able to draw on $1 billion of incremental demand on top of the chairman’s commitment and an anchor tranche of about $300 million. The final deal size is $565 million, $645 million and $590 million over the three tranches respectively.
Bond investors said that the preference for the shorter-dated tranche shows that given current volatility, the market wants to avoid long-term exposure to China’s property market.
The Reg S-only deal was naturally dominated by Asian investors with European and offshore US accounts taking only 4% and 2% of the November 2020 tranche, final distribution statistics shows.
In terms of investor type, private banking clients accounted for the bulk of the issue and took 56%, 96% and 94% of the two-year, four-year and five-year deal respectively.
Joint global coordinators of the bond sale were China Citic Bank, Credit Suisse and CEB International. Joint bookrunners and lead managers are Haitong International and UBS.
