Beijing Capital Land raised a $450 million perpetual offering that is callable in year five, the latest Asian borrower to tap the hybrid capital market in recent weeks.
Investors clamoured for the structurally appealing note as the likelihood of being called in year five is high, said sources close to the transaction. It received a total order book of more than $3.5 billion from 150 accounts, with 89% of the notes going to Asian investors and the rest to European investors.
Because of the overwhelming demand, Beijing Capital Land was able to tighten pricing from initial price levels of 7.375% area to 7.125%, a good 25bp worth of tightening, according to a term sheet seen by FinanceAsia. The issuer was also able to upsize its offering to $450 million from an original target size of $400 million.
“There are so many bells and whistles in this transaction, which means there is a very high call incentive in year five,” said the source. “It’s seen very much as five-year risk and these types of senior perpetual short-dated callable structures are certainly very attractive to investors.”
The last Asian borrower to raise a corporate hybrid note was South Korean provider of energy services SK E&S, a Fortune Global 100 company. On November 20, the company sold an inaugural $300 million 60-year bond that is callable in year five at a yield of 4.875%.
According to Dealogic data, borrowers have raised a record $13.7 billion worth of perpetual US dollar-, euro- and yen-denominated bonds in Asia ex-Japan so far this year. This is close to double last year’s volume of $7.4 billion during the same period.
Investor-friendly structure
Beijing Capital Land’s perpetual bond — which benefits from a keepwell deed, equity interest purchase undertaking and a letter of support from Beijing Capital Group — pays a fixed rate of 7.125% for the first five years.
If not called in year five, the coupon will reset in December 2019 and every five years thereafter to the prevailing five-year US Treasury yield plus an initial spread of 553.2bp and a one-time step-up of 500bp, according to the term sheet.
The bond’s distributions are deferrable but are cumulated and compounded each time it misses a payment. In such a situation, Beijing Capital Land would be barred from paying dividends.
In addition to these terms, any event-related risk, including the change of control, breach of covenants and relevant indebtedness default, will incur an additional 500bp step-up.
Due to these features, fund managers subscribed to slightly over half of these notes, followed by private banks with 31%, financial institutions 16% and corporates 2%.
Comparables
The nearest comparables for Beijing Capital Land’s latest offering were its existing perpetual notes, which were trading at 6.48% prior to the announcement of the deal, said a source close to the deal. The paper is callable in April 2018.
There was about 53bp worth of risk-free extension of this paper, which implies a fair value level of around the 7.04% area for a new implied five-year transaction, added the source.
“If the deal prices north of [its fair value of 7%], we expect it to perform in secondary given Beijing Capital Land’s state-owned enterprise backing, the proposed bond’s minimal extension risk — courtesy of its 500bp step-up — and the solid performance of the company’s previous perpetual,” said a Hong Kong-based credit analyst in a report note released before the pricing of the hybrid offering.
In fact, in secondary markets, Beijing Capital Land’s new perpetual is trading slightly up at a cash price of 100.125, which translates into a yield of 7.095% or 3bp inside where it came.
Beijing Capital Land is a mid-sized, Beijing-based property developer, with a land bank of 11.2 million square meters. Of that land bank, 78% of gross floor area is for residential projects, 20% for commercial and office projects and 2% for hotels.
The company was established in 2002 and it listed on the Hong Kong Stock Exchange in 2003, where its current market capitalisation is HK$5.8 billion (US$746 million). The developer is 46% owned by Beijing Municipality, with Singapore’s GIC holding a further 8% stake.
HSBC was the sole global coordinator and a joint bookrunner of the transaction. Other bookrunners include DBS, ICBC International and Standard Chartered.
