Hopson Development completed a well executed debut high yield bond early Thursday morning (November 3) via Credit Suisse First Boston. Both the issuer and lead manager had a lot to prove with the $300 million seven-year, non-call five deal.
Many market players had been skeptical that a BB+/Ba1 (S&P/Moody's) deal for a Chinese property developer could succeed in the existing weakened market - US Treasuries have surged to 4.60% recently, nearing their year-to-date record high of 4.65%.
A number of observers also deemed it risky taking this kind of deal into the high-yield market so soon after Shanghai-based property developer Fosun Group pulled its debut dollar-denominated bond. However, unlike Fosun, Hopson is listed on the HKEX and has a longstanding track record with equity investors, which would have provided debt investors with additional comfort.
On top of this, both Fosun and Hopson have had to contend with the prevailing negative sentiment towards the Chinese property market among international investors. The latter tend to view China's burgeoning property market as highly regulated, difficult to understand and possibly overheating.
Given this backdrop, non-syndicate bankers say CSFB did well to build a strong book and complete the deal in line with initial guidance. The transaction was priced at par with a coupon and re-offer coupon of 8.125% to yield 359bp over comparable US Treasuries, or 310bp over Libor.
The deal garnered a final order book of $700 million, with 75 accounts allocated paper. Geographically, Asia picked up the majority of the deal accounting for 50% of the overall book, with the US taking 38% and Europe 12%. Asian accounts were split 55% Singapore, 41% Hong Kong with the remaining 4% spread throughout the region.
In terms of investor type, asset managers bought up 67%, banks 14%, retail and insurers buying 4% respectively, with the outstanding 11% going to unspecified accounts.
In terms of sector comparables, the main benchmark was an investment grade rated deal for China Overseas Land. This Baa3/BBB rated deal has a 2012 maturity and was trading at 6.76% at the time of pricing.
Other comps include Xinao Gas and Panva Gas, which carry similar ratings to Hopson. Xinao's 2012 deal was trading 100bp tighter than Hopson at 7.125%, while Panva's 2011 deal was quoted at 7.50%. However, specialists say gas sector deals should trade about 100bp tighter than similar real estate offerings.
According to Standard & Poor's preliminary ratings report, "Hopson's financial profile is expected to improve significantly over the next two years, supported by a recent equity placement of about $123 million and anticipated larger sales volume and higher operating margins. As a result, the company's EBITDA interest coverage could improve from 4.9 times in 2004 to about seven times over the next two years, while its ratio of funds from operations to net debt could rise from 22% to more than 50% over the same. Debt to Capital ratio is expected to be around 48% following the issue of this bond."
Proceeds from the sale of the bonds will be used to fund ongoing property developments, land acquisitions and general corporate purposes.
As one of China's leading property developers, Hopson maintains its principal operations in Guangzhou. The company currently has a land bank consisting of more than 13 million square meters in gross floor space, in Guangzhou, Tianjin, Beijing and Shanghai.
In its first day Hopson held steady in secondary trading. The deal was trading up in a range of 0.75% to 0.875% from par.
