Future Land Development has raised a $350 million five-year bond, the first Chinese developer to do so in three weeks, supported by positive investor sentiment as onshore credit conditions improve.
Of late, China credit has outperformed and the high-yield space has been a beneficiary of the recent improvement in onshore credit conditions.
According to Morgan Stanley, bonds issued by Chinese property companies generated excess returns of 6.11% over the past two months, more than compensating for the negative excess returns of 2.03% that the asset class had generated until mid-May.
“The catalyst is a familiar one — easier credit conditions,” Viktor Hjort, credit analyst at Morgan Stanley said. “Easier credit does make this asset class more defensive.”
Hjort added that both investment-grade and high-yield typically outperform in periods where money supply — a helpful proxy for credit conditions — accelerates, and this has begun since mid-May when the People’s Bank of China pumped Rmb120 billion ($19.3 billion) into the economy, the most since January.
Given the favourable backdrop, Future Land was able to price its bond — callable in year three — at 10.5%, which is approximately 50bp tighter than initial price guidance of about 11%, buoyed by stronger investor sentiment for the sector, according to a term sheet. The coupon for the bond is 10.25%.
“There hasn’t been much activity in high-yield, especially from the property space, for a little while and this resulted in very attractive pricing terms,” a source close to the deal told FinanceAsia. “In fact, we haven’t seen pricing tighten that much since the beginning of the year.”
The developer’s new bond priced close to flat to its existing five-year notes expiring in 2018, which were trading at a yield-to-call of 9.905% prior to the announcement on Monday. Other comparables include Cifi Holdings and KWG Property’s recently issued five-year paper expiring in 2019 that were trading at a yield-to-call of 8.738% and 8.163% respectively.
The bond proceeds will be used to repay Future Land’s existing debt and to fund the acquisition of land for residential and commercial property development, according to a term sheet.
Future Land, which has more than 50 projects under development, has approximately Rmb400 million worth of short-term debt maturing in the next 12 months, Moody’s estimated in a recent report, adding that this bond issuance is positive.
“The new bonds will further strengthen Future Land's liquidity position and support its growth in the rest of 2014,” Lina Choi, senior analyst at Moody's, said. “The new bonds will also lengthen the average tenure of Future Land's debt portfolio, adding to the stability of its funding base.”
Oversubscription
Future Land’s Reg S-only offering obtained an order book of almost $3 billion from more than 200 accounts, according to a source familiar with the matter.
Asian investors subscribed to 88% of the notes, while the rest went to European investors. Fund managers purchased 65% of the paper, followed by financial institutions with 17%, private banks with 13%, and corporate, sovereign wealth funds and others with 5%.
The developer’s bond has traded up from the reoffer price of 99.046 to hover close to par in the secondary market, according to Bloomberg data.
Greenland Holdings was the last Chinese developer to raise a dollar-denominated bond. It sold a $1 billion dual-tranche note on June 25, making use of the recent relaxation of rules governing cross-border guarantees in China.
According to Dealogic data, Chinese developers have raised a total of $15.2 billion or 33 dollar-denominated bonds year-to-date, up 26.6% from last year’s $12 billion or 31 deals during the same period.
Future Land was founded in 1996 by its chairman, Wang Zhenhua, who has been in the property development business since 1993. The company, 58.86%-owned by Jiangsu Future Land, was listed on the Hong Kong Stock Exchange in November 2012.
JPMorgan and Credit Suisse were the joint global coordinators and bookrunners of Future Land’s offering. Other joint bookrunners include BNP Paribas, China Merchants Securities, CLSA and UBS.
