China Aoyuan was the first Asian issuer to tap the international bond markets this year, drawing impressive demand for its $250 million three-year note. By the end of marketing, the issuer had generated enough demand to sell the deal eight times over.
Successful deals tend to get plaudits for only a few days before they get replaced by the new hot issue. But China Aoyuan’s deal has continued to be discussed by investors and bankers. That is because the deal tested the boundaries of China’s notoriously hard-to-please bond regulators.
China Aoyuan came to the dollar bond market in January without official approval from the National Development and Reform Commission (NDRC), China’s powerful economic planning regulator. After bankers had spent much of December rushing their Chinese clients to the market, fearful that NDRC approvals would expire on December 31, China Aoyuan showed that a good relationship with the regulator can go a long way.
“To be the first issuer in the market this year, we needed to carefully manage expectations from our stakeholders and regulators,” Chan, head of corporate finance and investor relations at China Aoyuan, told FinanceAsia in an interview at the company’s harbourside offices in Tsim Sha Tsui.
China Aoyuan did not have explicit consent to sell a bond from the NDRC, Chan said. But the 36-year old, who described his experience in dealing with the regulator as “constructive”, was able to get permission to roll his 2016 quota until early 2017.
“From what we understand from the NDRC, the officials want to get a clear picture of the use of proceeds from the debt sale,” Chan, formerly deputy head of the capital markets division at Agile Property, another Chinese property company.
Chan recommends that potential issuers make the effort to understand the pressures facing the regulators, being careful to avoid two hot button issues in particular.
"The renminbi weakness and capital outflow in China are part of their key concerns," Chan said. "You have to strike a compromise that shows your motive to issue an offshore dollar bond."
In most cases, Chinese issuers are given an annual quota telling them how much debt they can raise in a single year. Most issuers are unwilling to test quite how flexible the deadlines are for these quotas, but Aoyuan showed that was certainly an option.
After Aoyuan, at least two property developers — Yuzhou Properties and Guangzhou R&F — issued their dollar bonds under the 2016 quota, but Times Properties was able to get a quick 2017 quota before its $375 million deal on January 16.
China’s approval process for bonds leaves some issuers — and investors — scratching their heads. This is partly because several local debt market regulators are effectively in competition with one another. But it is also because a lot of regulatory guidance happens on an unofficial level, according to a senior DCM banker in Beijing.
An additional source of confusion came in the middle of last year when the NDRC’s Beijing bureau, overwhelmed by approval requests, asked issuers to turn to local offices for approval instead. Officials from China Aoyuan met NDRC officials in both Beijing and Guangzhou before pushing ahead with the January bond, Chan said.
Chan said that China Aoyuan remains open to other funding options besides the bond market. Two weeks after the bond, the Hong Kong-listed company sealed a HK$1.5 billion ($194 million) club loan, which will be used to redeem an outstanding $300 million 2019 bond.
“Lowering our borrowing cost is one of our key objectives,” said Chan, who expects the borrowing cost to drop further to mid 7% this year, down from 11.4% in 2013.
According to Dealogic, Asia ex-Japan G3 debt issuance rose more than 70% year-on-year to $66 billion in January, in part driven by dollar bond sales of Chinese property developers.
China Aoyuan was founded in 1997 by Guo Zi Wen. Cathay Capital Group, a private equity fund, was an early investor in the company, joining during pre-IPO fundraising in 2006, a year before the company listed in Hong Kong. Cathay Capital still owns a 12.9% stake in the firm.
