Credit Suisse First Boston has launched a $300 million seven-year non-call five-year bond for Hopson Development, a Hong Kong-listed property developer in China. Roadshows are set to begin in Singapore and Hong Kong today (October 26).
The BB+/Ba1 (S&P/Moody's) rated deal has raised a few eyebrows from market players as it comes at a time when the high yield market is suffering a relatively weak period and is being launched only two weeks after Shanghai-based property developer Fosun Group pulled its debut dollar denominated bond.
The current weakness in the high-yield market notwithstanding, observers also believe the deal will be a struggle for CSFB given the overall uncertainty surrounding the mainland property market. This is because international investors remain uncomfortable with the Mainland property market's volatility and the government's attitude towards further tightening in what it considers an overheating sector.
However, Hopson also has a few factors in its favour. Unlike Fosun, the company is already listed in Hong Kong and has a longstanding trackrecord with equity investors, which should give debt investors added comfort.
So too, it is rated right at the top of the non-investment grade spectrum - one notch higher than Fosun. As such, the lead will be looking to push pricing towards higher rated China Overseas Land, which is rated BBB-/Baa3 and has an outstanding 5.75% 2012 bond.
This bond is currently yielding about 6.40% or 150bp over swaps and about 195bp over Treasuries. Fosun, by contrast, struggled to price a similar seven-year offering around the 9% mark.
In the past Hopson has primarily relied on short-term debt, pre-sale proceeds, and domestic bank funding. The new issue will help to improve Hopson's average debt to maturity profile, widen its investor base and diversify the company's dependence away from short-term uncommitted domestic financing.
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.
Hopson is one of the leading property development companies in mainland China, and has 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 four major cities: Guangzhou, Tianjin, Beijing and Shanghai.
