Large investors have long dominated the IPOs of Chinese companies overseas. But some bond investors are complaining that a small handful of investors can have an equally large impact in the bond market.
They pointed to a recent bond from Chinese property developer Yuzhou Properties as an example. The company launched its bond with already-strong anchor orders from so-called "friends and family" investors.
Yuzhou returned to the market with a $250 million bond on Tuesday evening, pricing a seven year non-call four deal well through its secondary curve. The company was able to get away with a yield of 6% on its new issue — far inside fair value, according to bankers familiar with the deal.
That was clearly a good result for the company. But it is not good news for institutional investors, who complain that so-called ‘friends and family’ deals are making it harder for them to get the returns they need.
“The cornerstone money has become more prevalent, ensuring the floatation success," said a fund manager in Hong Kong. "But it has a distortive effect on market pricing, prompting institutional investors to go down the credit curve for higher returns.”
Fair value ‘less significant’
The aggressive pricing of the Reg-S deal was driven in part by strong anchor demand from Chinese accounts, said a person familiar with the deal. Their support meant fair value estimates – important for fund managers to establish potential upside — became “less significant”.
“There were multiple anchors ahead of the deal launch,” the person said.
Those anchor investors ensured that the bookrunners had clear visibility over the price before launch. They initially marketed the B1/B+/BB- rated bond at “the 6% area”, and ended pricing at par with a 6% coupon.
The closest comparable was Yuzhou’s outstanding 9% December 2019 note, which was trading at a yield-to-maturity of 5.569% on Tuesday. That implied the company paid less than the curve extension of US Treasuries on a yield-to-maturity basis.
The bond priced amid increasing fears that China’s property sector is approaching the end of an asset-price bubble. China Overseas Land and Investment, another issuer in the bond market, announced it was moving away from lower-tier properties last week.
Some 51 investors ended up placing around $400 million of orders for Yuzhou's bond, slightly down from its peak order book of $450 million. Asian investors took 91%, leaving the remaining 9% for European investors. Fund and asset managers took 42%, banks 29%, private banks 20% and insurance companies 9%.
Cornerstone investors can have a major impact on the Hong Kong IPO’s of Chinese companies. In the most striking example, Postal Savings Bank of China allocated around 77% of its $7.43 billion IPO to cornerstone accounts.
But although the term “cornerstone” is used by some bond market participants, there are differences. Cornerstone investors in IPOs have well-defined restrictions, including lock-up periods in which they cannot sell shares. Those in the bond market — more correctly referred to as anchor investors — usually get away without such restrictions.
On Wednesday afternoon, the new bond was quoted at a mid-price of 99.563, equivalent to a yield of around 6.078%, according to market data.
BOC International, Credit Suisse, Haitong International and HSBC were the global coordinators of the bond. Deutsche Bank and Huatai Financial Holdings Hong Kong were joint bookrunners. Yuzhou Financial Holdings was a joint lead manager.
Update: This article has been updated to reflect HSBC's promotion from joint bookrunner to global coordinator before final pricing.
