Guangzhou-based property developer Evergrande Real Estate early Friday morning priced a Rmb9.25 billion ($1.4 billion) dual-tranche synthetic offshore renminbi bond. The Reg-S bond is denominated in renminbi and settled in US dollars. The deal is the largest Asian high-yield bond ever and the largest Reg-S bond since 2001.
Bank of America Merrill Lynch was the global co-ordinator and joint bookrunner with BOC International, Citi and Deutsche Bank.
Evergrande is the third Chinese real estate company to issue a renminbi bond in the synthetic format, following Shui On Land and SCE Property. The high-yield bond underscores a growing acceptance of local currency-denominated but US dollar-settled bonds. Tailored to meet global investor appetite for exposure to Asian currencies, the format also enables issuers to achieve a heft that they would not otherwise be able to achieve in the dollar market. Issuers are naturally hedged as they assume debt in the currency in which their assets are denominated.
“Evergrande showcases the quantum that can be executed within China and Asian markets – in their own currencies -- far exceeding what companies can raise in the US dollar bond market,” said a banker on the deal. “If Evergrande had wanted to raise this amount in the dollar market, I’m not sure it would have been able to,” he added.
The Rmb5.55 billion three-year tranche priced at a coupon of 7.50%, while the Rmb3.7 billion five-year tranche priced at 9.25%. The final pricing matched the initial guidance of around 7.5% and 9.25% for the three- and five-year tranches respectively.
Given the illiquidity of the swap market, the exact cost savings achieved through the synthetic format are hard to pin down.
If Evergrande had hedged its renminbi exposure in full through a swap arrangement, the cost of funding for the company would have been roughly 10.375% on a blended basis between the two tranches. In contrast, Evergrande’s US dollar bonds due January 2015 were yielding about 10.7%, which suggests savings of about 32.5bp.
However, a banker on the deal reckoned that the cost savings were closer to 75bp to 100bp, as Evergrande’s US dollar bonds due January 2015 trade in small sizes and there would be a new issue premium of about 50bp if Evergrande had issued in the US dollar market.
The deal was 3.6 times subscribed, with a Rmb33.1 billion ($5 billion) order book. About 136 investors participated in the three-year and 108 investors in the five-year tranche. The three-year bonds had better traction with investors, accounting for 60% of the demand. The rest went to the five-year tranche.
There was talk that Hong Kong billionaire Joseph Lau, the chairman of Chinese Estates, bought bonds to support the deal. Lau was a cornerstone investor in the company’s initial public offering in October 2009 and is also a big holder of the company’s bonds. In April 2010, Evergrande issued $600 million of senior notes due 2015, of which $350 million went to Chinese Estates and $250 million to Joseph Lau.
Of the three-year tranche, private banks and others took 52%, funds 36% and banks 12%. Of the five-year tranche, private banks and others bought 48%, funds 40% and banks 12%. By geography, Asia took 86% of the three-year tranche, while Europe and offshore US took 14%. Asian investors also bought 80% of the five-year tranche, while European and offshore US accounts took the rest.
Bonds slip in secondary
While the deal created a new benchmark in terms of size in the high-yield market, bankers away from the transaction criticised Evergrande's underperformance in the secondary market.
According to one of the leads, both tranches fell to as low as 99.25, or 0.75 points below the par issue price early on Friday, but stabilised as the day progressed with the three-year bond settling at 99.75/100 and the five-year at 99.875/100.
However, one rival said that the five-year tranche clearly underperformed, falling to as low as 98.25 while the three-year tranche fell to as low as 99.
Broadly, the Chinese real estate sector has been softening on concerns about new supply. The China SCE Property 2016s slipped slightly below par to 99.375 last Thursday. Evergrande's dollar bonds due January 2015 have been volatile and were quoted at yields of 10.7% to 10.9% last Friday afternoon.
“I think some investors are having a bit of fatigue over Chinese property development bonds. Evergrande’s renminbi bond is trading below par [with regard to] both the three-year and the five-year tranche,” said one investor.
There were also concerns that Evergrande's aggressive expansion strategy would increase the subordination risk of the new notes. At least 45% of the net proceeds will be used to repay onshore borrowings, which will lessen the subordination risk in the short-term. However, it is possible that Evergrande may assume more onshore debt later.
On January 10, Moody’s downgraded Evergrande’s senior unsecured bond rating to B2 with a negative outlook from B1, citing concerns of increased legal and subordination risk.
“Its fast growth has resulted in a higher level of onshore debt, which has in turn raised its secured and subsidiary debt-to-total assets ratio to above 20%,” Moody’s analyst Kaven Tsang said in his report. “Moody's does not expect such a level to fall, given Evergrande's ambitious business plan," he added.
The issue is rated B2 (negative) by Moody's and BB- (stable) by Standard & Poor's.
Hopson Development
Further adding to new issuance from China’s property sector, Hopson Development last Friday evening priced $300 million of five-year non-call-three bonds. UBS was sole bookrunner for the deal.
The yield was fixed at 11.75%, at the wide end of the 11.5% to 11.75% range. The whisper was at mid 11%. The print also came at the low end of the $300 million to $400 million size range. The bonds, which were issued at par, struggled in the market as they were competing with Evergrande's mammoth issue.
The deal gathered an order book of $650 million from more than 90 accounts. Asia took 88%, Europe 11%, and offshore US 1%. Private banks took 49%, fund managers 29%, banks 16% and corporations and others 6%. The expected issue rating is B2/B (Moody’s/S&P).
Hopson last tapped the US dollar high-yield bond market in 2005.
Elsewhere, seafood products company Pacific Andes Resources Development has mandated Bank of America Merrill Lynch, HSBC and Standard Chartered Bank as joint bookrunners for a proposed renminbi-denominated Reg-S senior bond.
Roadshows covering Singapore and Hong Kong are due to start today and a deal will launch subject to market conditions after that.
