Central China Real Estate (CCRE) raised $200 million from a five year non-call three bond on Tuesday, but only after abandoning a plan to price inside its own curve.
The company approached investors on Monday morning with price guidance of “the 6% area” for its five-year bond, which featured a call option after three years. But despite a plan to price the deal overnight, the books were still open the following morning.
“We think the initial pricing of the new bond was wrong,” said a source familiar with the transaction, adding that the issuer appeared to have miscalculated the ‘halo effect’ it got from being partly-owned by Singapore’s CapitaLand, which is in turn partly-owned by Temasek.
But this was not the unanimous viewpoint. A person familiar with the company said that investors' willingness to take on risk had reduced dramatically in the days before pricing, and said that syndicate bankers did not push for a higher price target before launch.
"This is not so much about the company itself," the person said. "It is more the negative view of investors on the sector after the government's tightening policy."
Investors pointed to the 6.5% yield they could get by investing in the company’s outstanding $300 million 6.75% January 2021 bonds. That is not always a fair comparison — secondary markets, after all, offer limited liquidity — but in this case, it was enough to keep investors away.
CCRE and its bankers had learned their lesson by the following morning, returning to investors with a higher price guidance of around 6.75%. That offered investors at a premium over its old bonds, and in the end, proved enough to close a successful deal.
The bookrunners built an order book of $750 million across 90 accounts, according to bankers close to the deal. The bond ended up being priced at par to yield 6.75% on Tuesday.
Asian investors bought the vast majority of the deal, with just 1% being allocated to Europe, the Middle East and Africa. Fund managers took 64%, private banks 20% and insurance companies 11%. The remaining 5% went to other investors.
Lost property
Increasing worries about Chinese property prices have hurt demand for a sector that was once embraced by dollar bond investors. That is not helped by the fact the CCRE is based in Henan province, traditionally regarded as a ‘tier three’ city.
“Institutional investors are generally more cautious to developers outside of tier-one cities,” said a fund manager in Singapore, referring to to Beijing, Shanghai, Guangzhou and Shenzhen. “They will be less resilient to economic shocks in the future.”
CCRE also has a leverage ratio that worried some investors. According to its latest financial results, CCRE’s debt-to-equity ratio, an industry yardstick of indebtedness, hit a record of more than 180% at the end of June.
The final factor that hurt CCRE was simply a poor market backdrop. The five year iTraxx Asia investment grade index widened by around 2bp on Monday night.
“Sentiment has turned cautious to property developers and trading conditions lukewarm ahead of the US Presidential election next week,” one of the syndicate bankers said.
According to a syndicate banker, the company paid a new issue premium of about 10bp on top of its existing senior January 2021 bond, which was trading on a cash price of 108.5% to yield 6.5% on Monday.
CapitaLand, Southeast Asia's largest property developer by market value, bought a 29.75% stake in CCRE for Rmb601 million in 2006. It currently owns a 26.95% stake, according to its latest annual report.
Credit Suisse, DBS, Deutsche Bank, Morgan Stanley, Nomura are joint bookrunners.
Additional reporting by Matthew Thomas
Update: This article has been updated to include comments from a person familiar with the company.
