Two similarly rated high-yield Chinese property developers priced bonds last Friday, but they chose different routes for their fundraising. The first to price was trade centre developer and operator China South City, which tapped the US dollar bond market with a $250 million five-year non-call-three issue.
On the same day, Fujian-headquartered residential developer China SCE Property priced a five-year Rmb2 billion ($301 million) bond in a synthetic format, meaning it is denominated in renminbi but settled in US dollars. China SCE Property was the second issuer to sell a public synthetic offshore renminbi bond, following Shui On Land’s inaugural Rmb3 billion ($450 million) three-year bond in December last year.
As China SCE Property’s deal was in a Reg-S/144a format, it was also the first time that US investors had the opportunity to participate in a synthetic offshore renminbi bond. Deutsche Bank and HSBC were joint bookrunners.
The deal reflected keen investor appetite to take exposure to the renminbi. China SCE Property’s five-year bond was initially expected to raise about Rmb1.5 billion. The deal size was revised from Rmb1.5 billion to Rmb1.75 billion during marketing and eventually upsized to Rmb2 billion. The final order book was Rmb10.5 billion, split across 120 accounts.
The five-year bond paid a coupon of 10.5%, which was at the tight end of the 10.5% to 10.75% guidance. The notes priced at par, making the coupon equal to the yield. In terms of distribution, Asia took up 78%, Europe 12% and the US 10%. Funds bought 56%, private banks 33%, banks 9% and others 2%.
If China SCE Property had hedged its renminbi exposure completely, its cost of funding in US dollars would be around 13.18%. The synthetic format was said to offer the issuer a cost saving compared to China South City, which tapped the US dollar bond market directly.
“China SCE Property chose to tap the synthetic market and the cost saving was over one percentage point versus China South City. By going for a synthetic format, China SCE Property got better participation from the US and fund managers and more accounts came in,” said a banker.
China South City’s $250 million of five-year non-call-three bonds were priced with a yield of 14.25%, following guidance in the 14.25% area. The coupon was fixed at 13.5% and the notes reoffered at 97.381.
The Reg-S/144a deal printed at the upper end of the $200 million to $250 million expected size. The order book reached more than $500 million from over 90 accounts. BOC International and UBS were joint bookrunners.
The two issues have the same rating by Moody’s and S&P (B2/B). However, Moody’s has a positive outlook on China SCE Property and a stable outlook on China South City. The other difference is that China South City’s five-year bonds are callable after three years, while China SCE Property is a five-year bullet.
Asia took up 79% of the China South City deal, Europe 20% and the US only 1%. By investor type, private banks bought the lion’s share with 48%, followed by fund/asset managers with 33%, banks with 13%, and insurers/others with 6%.
There was rumoured to be a rebate given to private banks for selling down the bonds, which explained the high participation from private banks.
China South City's bonds rose in the secondary market and on Friday evening were quoted above the reoffer at 98.25.
Having a second synthetic offshore renminbi bond in the market will be helpful for other China property names planning to issue bonds. As only two such deals have priced so far, there are few comparables and the market is still ascertaining the fair value of these synthetic instruments.
China SCE Property priced about 500bp wide of the 5.5% yield that Shui On Land’s synthetic was trading at in the secondary market. However, the two synthetics were not like-for-like comparisons as Shui On Land sold a three-year bond whereas the China SCE Property deal had a five-year maturity. The latter’s longer tenor made it more challenging to sell, as most investors who buy renminbi bonds with a view that the currency will appreciate usually have an outlook of up to three years.
China SCE Property is much further down the credit curve than Shui On Land. Although Shui On Land is unrated, it was founded by Hong Kong tycoon Vincent Lo and is viewed as a much stronger credit with good brand recognition.
This week is expected to be another busy one for the G3 bond market. Philippine issuer Energy Development Corp will be meeting investors in Singapore and Hong Kong starting today. Subject to market conditions, a transaction may follow once the investor meetings have been completed. Deutsche Bank and J.P. Morgan are joint bookrunners for a Reg-S US dollar bond that may raise up to $300 million.
