China’s Gome Electrical Appliances Holdings completed its first-ever US dollar-denominated bond offering last Friday, as the Hong Kong-listed retailer seeks to diversify its funding channel.
The company, rated BB by S&P, was founded by shamed billionaire Huang Guangyu, who was handed a 14-year jail sentence for bribery, insider trading and illegal business dealings. Huang, a high-school dropout who became China’s richest man, retains a sizeable stake in the company.
Gome issued a profit warning on Febuary 22, telling investors it expected its 2016 profit to be down by between 65% and 75% compared to the previous year's figures. This is in part due to a strategic plan to transform its business model from physical stores to online retailing.
But investors seemed unfazed by both the company’s corporate legacy and its challenging operating outlook, placing more than $2.8 billion of orders at peak level. The final order book settled at $1.6 billion from 90 accounts, according to a person familiar with the company.
“The scarcity value of high-yield bonds in Asia has helped the company to raise fresh capital at a compelling rate,” the person said. There have only been $11 billion worth of high yield bonds this year, and those investors hoping to get sub-investment-grade deals from China have not had any deals outside of the property sector or local-governement financing vehicles.
Bankers approached potential investors in the Reg-S deal with initial price guidance in "the 5.5% area" before tightening that to 125bp each side of 5.125%. They built enough demand to price the bond at the tight end of guidance, closing the $400 million March 2020 note at par with a 5% coupon.
The strong support for the deal continued in the secondary market. The Singapore-listed bond traded slightly up at a cash price of 100/100.15, according to market data.
The closest comparables for the bond were two BB rated retailers in China and Hong Kong. Bankers used 361 Degrees’ 7.25% June 2021 bond and Sogo department store operator Lifestyle International’s 4.25% October 2022 bond as the valuation yardsticks.
Before Gome launched its bond, 361 Degrees' bond was trading at a yield of 5.2% while Lifestyle's deal was yielding 4.2%. That meant the Gome bond priced inside the secondary curve of 361 Degrees, a Chinese sportswear maker rated Ba2/BB by Moody’s/Fitch.
Asian investors took 89% of the deal, leaving 11% for those in Europe and the US. Asset managers and fund managers were allocated 60%, banks 27% and private banks 13%.
Gome plans to use the proceeds of its bond to expand its business operations overseas, as well as for general corporate purposes.
The company said it issued Rmb9 billion ($1.3 billion) of renminbi-denominated bonds last year. Huang and his family remain the largest shareholder in the company, while US fund manager Vanguard is the second-largest investor with a 1.7% stake.
Barclays is the sole global coordinator of the new deal.
