Kaisa brings CB with 8% coupon

After a drought of three weeks, the Asian convertible bond market sprung back to life last night with a new deal for Kaisa Group Holdings. The Chinese property developer sold Rmb1.5 billion ($225 million) worth of five-year CBs with a three-year put, which will pay investors a hefty coupon of 8%. The bonds are settled in US dollars.

Shenzhen-based Kaisa, which counts Carlyle and Temasek among its pre-IPO investors, focuses on urban development, including large-scale residential properties and integrated commercial properties in the Pearl River Delta, Shanghai and Jiangyin in the Yangtze River Delta region, Chengdu in the Chengdu-Chongqing region and Changsha in central China.

It listed in Hong Kong just shy of a year ago and is among a group of second- and third-tier developers that have seen their access to the local bank market restricted by the Chinese government’s efforts to curb excessive lending by the country’s banks. While construction loans are still available, borrowing to buy new plots to add to landbanks and to pay for land premiums has been cut off, forcing the developers to turn to the capital markets for funds. In late April, Kaisa sold $350 million of five-year bonds with a coupon and yield of 13.5% through Citi, Credit Suisse and UBS and recently it also obtained a $39 million unsecured loan from a bank in Hong Kong.

This may explain why Kaisa chose to brave the markets at a time when volatility has picked up following growing concerns about further monetary policy tightening in China as well as worries about an escalating sovereign debt crisis in Europe, and many investors are also starting to wind down for the year. According to a source, the company knows that funding is key if it wants to continue to grow and there is no reason to believe that the market environment is going to make it any easier to raise capital in the months ahead.

The coupon was obviously there to make investors look beyond the uncertainties in the sector and buy into the deal, but given Kaisa’s status as a true high-yield credit – it is rated four notches below investment grade by Moody’s and three below by Standard & Poor’s – and the 32% drop in its share price since listing, market watchers referred to the deal as being fairly priced, rather than cheap.

Sole bookrunner Credit Suisse took investors on a visit to one of Kaisa’s development sites on Tuesday this week and arranged a call with vice-chairman and executive director L L Tam when the CB launched yesterday evening. His presentation was said to have convinced a number of outright accounts to come in.

However, the most important convincer was perhaps the fact that the bookrunner had also signed up two Chinese high-net-worth individuals as cornerstone investors before launch, which together had agreed to buy just over half of the deal, or $120 million worth. While not identified by name, their presence – and the smaller number of CBs that needed to be placed through the market – gave other investors the confidence to participate as well, and when the order books closed after a couple of hours, the rest of the deal was more than three times covered, according to a source. And that was after Credit Suisse capped each order at 10% of the deal, following signs that investors were asking for significantly more bonds than they really wanted to make sure they didn’t miss out.

CBs issued by Chinese property companies tend to be primarily bought by hedge fund accounts that invest on an outright basis, but given the high coupon and the lack of stock borrow, the source said about 40% of the deal went to “real” outright investors, mostly out of Europe. The fact that European markets were trading higher during the marketing would have been helpful in getting those investors to commit.

Late last night the bonds were trading at 101.5 to 102.5, suggesting that the support was carrying over into the secondary market.

Kaisa offered the bonds with a fixed conversion premium of 20% over yesterday’s close of HK$2.35, which will result in a conversion price of HK$2.82. The latter is well below Kaisa’s IPO price of HK$3.45 in December last year and reflects the tough journey the company has had in the stock market since listing. However, after hovering between HK$1.50 and HK$1.60 since mid-May, the stock started to recover in early November after the company announced stronger than expected pre-sales. In the past three sessions alone, the share price has added 9.8% -- although Chinese property developers as a group have also had a rebound.

In light of those strong gains and to ensure a good aftermarket performance, the bookrunner pushed the issuer for an 8% coupon, which is where it priced. However, the deal was initially offered with a coupon range of 7.5% to 8%. The bonds were sold at par and will also be redeemed at par, meaning the yield-to-put is also 8%. They come with an issuer call after three years, subject to a 130% hurdle.

The deal was marketed at a credit spread of 1,100bp to 1,200bp, which is in line with where Kaisa’s own high-yield bond is trading. Together with an assumed 5% stock borrow cost and a full dividend pass-through, the wide end of the credit spread range resulted in a bond floor of 91.5% and an implied volatility of 22% to 23%.

According to the term sheet, Kaisa will use the proceeds to finance the acquisition of new land in China and for general working capital. While it didn’t specify any particular projects, the company has been on an acquisition spree lately and most of the money is expected to cover costs related to those purchases. Last week, it said it had bought nine parcels of land for residential use in the provinces of Sichuan and Liaoning at a total cost of Rmb1,292 million ($194 million) through land auctions. Earlier this month it also bought two sites in the Jiangsu province at a combined price of Rmb300 million and in October it paid Rmb230 million for a residential plot of land in Shunde in the Guangdong province.

As of last week, the company had reaped Rmb8.3 billion from pre-sales this year and said it had an ample cash balance of approximately Rmb3.8 billion at the end of October. However, money is still needed. When announcing the latest land acquisitions, chairman Kwok Ying Shing said the company intends to expand its investments in the Pan-Bohai Bay rim region as well as the other regions where it is already active “in a bid to become a leading property developer in China with nationwide coverage”.