Fatigue may have finally taken hold in the Chinese property sector, judging by investors’ reception towards China Properties Group’s dollar transaction that failed to price overnight.
China Properties launched a three-year high-yield dollar bond on Wednesday morning, hoping to entice investors with a 12.75% area offering. Come Thursday, the Reg-S deal still has not priced – a possible indication that investors are reacting cautiously towards an overcrowded sector.
“There has been a reasonable amount of property supply and it’s probably the fact that there’s not an endless amount of demand right now, especially for the single B end of the spectrum,” said a Hong Kong-based investor to FinanceAsia. The deal is expected to be rated B-, but the issuer’s standalone rating is B-.
“If it was a straightforward case of being outstanding in terms of value, then the transaction would be doing a lot better or at least investors would be more eager to snap it up,” he added.
For the year-to-date, Chinese real estate developers account for more than 70% of the dollar-denominated transactions that came from the world’s second largest economy, according to Dealogic data. Volumes touched $5.6 billion with 13 deals year-to-date, which is not too far from 2013’s record breaking numbers of close to $7 billion in total volume with 18 deals during the same period.
And although some credit analysts highlighted that a return of 12.75% is decent for a rare tenor of three years in the G3 space – which would normally come around the high-single digits – emerging market fragility has taken the spotlight in recent days.
As a result, emerging market debt – especially in the high-yield space – has started to feel the pinch. “Fund holders are seeing less money coming into that asset class,” said the investor.
Amid jitters of an unwinding of the US Federal Reserve’s monetary stimulus programme, investors have withdrawn $4.5 billion from funds in the week through February 12, extending the total outflow this year to US$29.7 billion, according to Barclays, which cited data provider EPFR Global.
China Properties dropped its original plans to issue a renminbi-denominated transaction – announced on Tuesday – in favour of a dollar one on Wednesday following feedback from the market, according to a statement filed to the Hong Kong Exchange.
While there is still the argument that tighter onshore banking liquidity and potential hikes on interest rates have pushed some Chinese developers to access offshore markets for funding, some experts believe this is not the case for China Properties.
“The company came with a CNH proposal the day before but I think they failed to get enough interest; that’s why they switched to US dollars,” said the Hong Kong-based credit analyst at a foreign bank.
“Also the lead said that the book was covered yesterday, but it’s uncommon to have a deal that hasn’t printed yet given that the book is already covered,” added the analyst. “I think the book order was not as strong.”
Some syndicate bankers are sceptical as to whether the China Properties’ transaction will be able to print, especially now that market sentiment has dipped again on the back of weaker manufacturing numbers from China.
A preliminary February purchasing managers’ gauge from HSBC and Markit Economics fell to 48.3 – the lowest in seven months – signaling a second month of contraction for Chinese manufacturing and missing an economists’ estimate for 49.5.
“Markets are softer, so I don’t know why one would go with a property name right after that data point,” said the Hong Kong-based syndicate banker. “It surprises me to be honest.”
China Resources Land launched a dual-tranche dollar benchmark bond on Thursday. The five- and 10-year tranches have initial price guidances of Treasuries plus 300bp area and 340bp area respectively, according to sources close to the deal.
HSBC is the sole global coordinator and bookrunner of the Baa1/BBB+ rated transaction. Other bookrunners include ABC International, Bank of America Merrill Lynch, DBS and UBS.
BofA Merrill is the sole bookrunner of China Properties’ transaction.
