Asia’s debt capital markets returned to form last week with another three deals raising a combined $1.7 billion on late Thursday night/early Friday morning, following a $1 billion bond from DBS earlier in the week. Powerlong Real Estate Holdings challenged the waning investor enthusiasm for China's busy property sector with a $200 million high-yield offering, while Korea Hydro and Nuclear Power Company brought yet another $500 million quasi-sovereign from Korea that attracted large demand.
Also pricing in this narrow window was the Republic of the Philippines' $1 billion peso-denominated global bond (see separate story on our website today).
Powerlong
The first among these latest three issues was Powerlong, which priced a debut 144A/Reg-S $200 million five-year issue that pays a coupon of 13.75%. The bonds were reoffered at par to yield the same 13.75%, which marked the tight end of the 13.75% to 14% guidance. The notes will mature on September 16, 2015 and are callable after three years. The notes carry a B1 rating from Moody’s and a B+ by Standard and Poor’s.
This was Powerlong’s first issue in the international debt markets and came some 11 months after its $355 million initial public offering in October last year.
The deal was 2.25 times subscribed, with joint bookrunners HSBC and Royal Bank of Scotland taking orders from 88 accounts. Asia-based investors were allocated 64% of the bonds, while European accounts took 31% and on-shore US investors 5%. Funds and asset managers represented 49% of the investors in the sale, private banks and retails accounts bought 40%, and the remaining 11% of the bonds were sold to banks and other types of investors.
Bookrunners viewed the most liquid benchmarks for Powerlong’s debut to be Renhe Commercial Holdings' recent five-and-a-half-year 13% bond and KWG Property’s seven-year deal. At the time the deal was announced, the KWG 2017 notes were trading at a yield of 12.5%, while Renhe was trading at between 12.8% and 12.9%.
“The reality is that Renhe, despite being on negative watch from Moody’s, is rated Ba2,” said one banker. “So from a credit standpoint investors will look at that deal and price on the back of it.”
However, that pricing rationale wasn't completely supported by the market. In fact, some investors pegged Powerlong to issuers like Kaisa and Fantasia, which carry a similar rating to the borrower. At the time of pricing, the Kaisa 2015 bonds were trading at a yield of 14%, while Fantasia’s five-year note, which has practically no liquidity, was quoted at 14.5%.
Brayan Lai, a credit analyst at Credit Agricole CIB, was one of the specialists who viewed Kaisa and Fantasia as more comparable issues. “I would see this more as a Kaisa-, and in a manner-of-speak Fantasia-type credit,” he said, adding that this made Powerlong’s 13.75% coupon look unattractive.
However, the bookrunners were quite specific as to why these two credits were not chosen as benchmarks. “From an origination stand point, we want to be looking at credits that sit at the tighter end of guidance,” said a source at one of the arranging banks, who noted that Fantasia and Kaisa aren't liquid enough to be used as reliable benchmarks. Also, the issuer wished to target a stronger group of international investors than that achieved by the likes of Fantasia.
Indeed, Fantasia has seen very little price movement since pricing. “It is not liquid because it was sold to a lot of friends and family, while in the case of Renhe and KWG there was a clear bookbuilding process, so investors prefer to look at those," said a source.
The Powerlong 2015 bonds traded up to 101.375 in Asian trading on Friday after being issued at par.
Despite the small issue size and the relatively muted demand for the bonds, bookrunners viewed the performance as satisfactory in light of the spate of issuance from the China property sector this year.
“Investors are feeling fatigue,” said one source. “There’s been a lot of supply and a lot of the bonds [in the China property sector] have underperformed.” Taking this into account, investors have become selective about which credits they want to buy in the primary markets – particularly when it comes to the China property sector.
Korea Hydro
Meanwhile, Korea Hydro was a run-of-the-mill five-year 144A/Reg-S transaction. The $500 million deal size was decided on early in the bookbuilding process and wasn't revised even though the bookrunners -- Bank of America Merrill Lynch, Citi, Deutsche Bank, HSBC and UBS -- secured $5 billion worth of orders from more than 340 accounts.
US accounts bought 45% of the bonds, Europe bought 21% and Asian investors 34%. Fund managers, which were the biggest investor group in the sale, took 69% of the notes, banks took 9%, private banks 8%, insurance and central banks shared 8% of the sale and the remaining 6% was divvied up between corporate and other types of accounts.
Initial price guidance went out Thursday morning Hong Kong time at Treasuries plus 200bp. This was revised soon after the opening of London trading to 190bp. The healthy demand for the investment grade Korean credit allowed the bonds to price at the tight end of this guidance at Treasuries plus 185bp.
Korea Development Bank's 5.5-year 2016 bonds issued earlier this month and Korea Hydro’s existing 2014 securities were viewed by investors and bookrunners as the most liquid benchmarks. At the time of the announcement, the Korea Hydro 2014 bonds were trading at a spread of 150bp over Treasuries, while the KDB 2016s were at 182bp over.
“If you account for the difference in the yield curve to be 14bp to 15bp, the new notes should’ve paid 200bp if they had been issued with a five-and-a-half-year maturity,” said one source. As it were, the new notes, which mature on September 16, 2015, came about 15bp inside the recent KDB 2016s.
On Friday, the Korea Hydro 2015s tightened even further to a spread of 173bp.
The Asian pipeline suggests the market will be busy over the next two to three weeks with more issuance expected from Korean high-grade credits. Borrowers from the Philippines and India are also expected to dominate the primary markets in the coming fortnight.
