Evergrande sells downsized $1b bond

Evergrande Real Estate sold a downsized $1 billion five-year bond on Tuesday night that is callable in year three, signalling continued poor investor sentiment towards the broader Chinese property sector despite ebbing concerns towards Kaisa.

The Guangdong-based Chinese developer, which launched the deal with final guidance fixed at 12% on Tuesday morning, downsized the offering from an initial target size of $1.5 billion, suggesting the pricing was far more aggressive than anticipated.

"We haven't seen this type of marketing strategy for a while," said Oscar Chow, head of Asia credit research at Mitsubishi UFJ Securities (Hong Kong) to FinanceAsia. "They should've come out with a wider guidance and allow the pricing to tighten based on demand."

China's property sector has been plagued by rising default fears since the beginning of the year, when Kaisa failed to make an interest payment of $23 million on its $500 million 2020 10.25% notes, due on January 8.

Although such fears have dwindled over the last week after Sunac China made plans to make an offer for all of Kaisa, having already agreed to buy a 49.3% stake in the troubled group from former chairman Kwok Ying Shin and his family members, the sector is still not out of the woods.

According to Standard & Poor's in a note on February 9, although Kaisa remedied the non-payment of interest for the notes due 2020 within the grace period, which is a positive move, the company will still need to negotiate and resolve the repayment demands of other creditors.

"Although the recent coupon payment avoided a cross-default on Kaisa's offshore notes totaling $2.5 billion and lessened immediate default risks, we believe the repayment risks remain heightened," said Christopher Yip, credit analyst at S&P.

According to Kaisa, creditors, project partners, suppliers and service providers are calling for immediate repayment of a total of about Rmb28 billion ($4.5 billion). Additionally, the company said a further Rmb17 billion of loans might become due and repayable.

Sunac China, which last week looked set to buy the stake for HK$4.55 billion ($587 million), will make an offer for all of Kaisa's shares at HK$1.80 per share, the companies said in a joint announcement on Friday.

Fragile secondary trading

Investor appetite for high-yield Chinese property names is still clearly fragile.

Shimao Property, which raised a $800 million seven-year non-call four bond on February 3, has been trading under its reoffer price of 100 in the secondary market. On February 11, it was trading at a cash price of 99.648 or yield of 8.442%.

Evergrande’s outstanding five-year bonds expiring in 2018 were trading at a cash price of 93.965 or a yield of 10.753% on Tuesday afternoon, according to Bloomberg bond data. The new $1 billion notes are also trading slightly below par.

"Sentiment is still pretty fragile and to bring an Evergrande deal is pretty ambitious," said MUFG's Chow. "So far, secondary performance is consistent with Shimao, which also hasn’t performed."

Short-term debt

Nonetheless, proceeds from Evergrande’s offering will enhance the company’s overall liquidity position and will be used to refinance its existing debt.

Based on its financial statements, the developer’s cash-to-short-term-debt ratio had declined significantly to 84.5% at end-June 2014 from about 150% at the end of 2013 because of a sharp rise in short-term debt funding.

"In this situation, the proposed issuance will help reduce its level of short-term debt because the bond proceeds will be largely used for refinancing existing debt," said Franco Leung, credit analyst at Moody's. "But, the proposed issuance will not have a material impact on Evergrande's debt leverage, which is already at a high level for its rating."

Evergrande's recent sales performance has been solid. The company's contracted sales in 2014 were stronger than that of its major peers, at Rmb131.5 billion ($21 billion), and exceeded its target.

Sunac China was the last issuer to raise a single-B rated bond in Asia. The developer sold a $400 million five-year bond with a coupon of 8.75% last December. The note is rated B+/B1/BB- by S&P, Moody's and Fitch, respectively.

JP Morgan was the sole global coordinator and a joint bookrunner of Evergrande’s bond. Other joint bookrunners include Credit Suisse, Deutsche Bank and China Merchants Securities Hong Kong.