After two weeks of speculation about whether or not Renhe Commercial Property Holdings would return to the international bond markets, the Chinese property company priced a $300 million five-and-a-half year security with a 13% semi-annual coupon last Thursday evening -- less than four months after its last deal.
Rumours of a Renhe transaction initially surfaced in early August amid a flurry of property developers looking to come to market, including Country Garden and KWG Property. Facing an investor base that has had its fair share of high-yield property bonds to choose from this year, neither Country Garden's nor KWG Property's aftermarket performance matched analyst expectations.
However the performance of Chinese property bonds strengthened last week by a quarter to half a percentage point a day, and Renhe was able to take advantage of the more positive backdrop as well as a thin supply of bonds during the week to achieve a better launch than its peers.
“They picked the right window,” said one banker, “and there was a good rally the night before they priced.”
This helped attract a reasonable amount of interest for the high-yield credit, with a final order book of $600 million and demand from just over 100 accounts.
The Ba2/BB rated senior notes were re-offered at par to yield 13% and will mature on March 10, 2016. They were issued in the 144A/Reg-S format, which one source said was a part of Renhe’s marketing strategy to attract more London- and New York-based investors.
However, Renhe was only able to sell 20% of the bonds into Europe and 8% into the US. The rest of the bonds were bought by Asia-based accounts.
“The main issue I see with Renhe is sponsor and key-person risk, given the political and ex-military linkages,” said Brayan Lai, a credit analyst at Credit Agricole CIB. “Thus, from an investor standpoint, there is no two-ways around it, you either get very comfortable with them or you don't get involved in the bonds at all,” he added.
On that note, the bonds attracted a very strong bid from private banking accounts, which helped secure 34% of the sale. Fund managers took 50%, banks 7%, corporate investors 5% and the remaining 4% was bought by other types of investors.
The most comparable notes for the issue were Renhe's own existing 2015 bonds, a $300 million five-year deal issued in mid-May with an 11.75% coupon and a 12% yield, that were trading at between 12.2% and 12.3% at the time the new deal was announced. Given the near one-year maturity extension of the new bonds plus taking into account a new issue premium, the bookrunners – BOC International, Bank of America Merrill Lynch and UBS -- launched the deal with a yield guidance in the 13% area.
The guidance remained unchanged when Asian trading closed on Thursday. Together with talk that the bookbuilding process was ticking over slowly, onlookers viewed this as a sign that the deal was failing to attract demand.
“It’s not exactly rocking,” commented one rival banker to the deal. "When Renhe hits the market a whole percentage point wider it just pushes the whole sector wider,” he added.
Credit Agricole's Lai didn't agree on that latter statement. “I think at least 1% outside where the company’s 2015 bonds trade in order to compensate for the duration and curve is fair value,” he said.
Indeed, the speculation of a poor reception was quashed as the notes immediately traded above par after pricing. At the opening of the Asian trading session on Friday the new 2016s were trading at 100.375. By late Friday afternoon they had dropped back to 100.25 to yield 12.678%. One source close to the deal noted that it was one of the few deals from the sector that traded above par on the first day.
“The fact that it traded up means the bonds were allocated appropriately,” said one source familiar with the deal. “Natural distribution and natural demand is helping the bonds post trade,” he added.
Renhe said it will use the proceeds to finance existing projects, to acquire and develop new projects and for general working capital.
The sound performance of Renhe's second trade this year may be enough to entice other Chinese property borrowers back to the market. Already, Powerlong has announced it will be going on the road this week. The commercial property company has disclosed in a filing to the Hong Kong stock exchange that it will be looking at financing, so the roadshow will most likely end with a deal.
During the peak of volatility two weeks ago, rumours were flying that Road King and Kaisa Group were also looking to price. Although the markets have become more stable again, it is still not certain that these names will return this month; both borrowers are keeping their cards close to their chests.
