Shimao Property raised a $600 million seven-year note on Tuesday, joining the flurry of Chinese developers that have tapped the market this year amid tighter onshore banking liquidity and a potential rise in interest rates.
The Hong Kong-listed group's transaction – with a callable option in the fourth year on Tuesday – is the longest in duration and lowest in coupon done in the high-yield space so far this year.
It was also priced tightly given Shimao’s long-standing reputable presence in Asia’s debt capital market and is its first issuance since receiving rating upgrades to Ba2/BB/BB+ from Moody’s, Standard & Poor’s (S&P) and Fitch, respectively, last year..
“Shimao has built a reputation over the years for being a very strong and responsible issuer and very much proved that last night by printing a transaction at the right size,” said a source close to the deal. “The pricing of the deal was very aggressive.”
The nearest comparables for Shimao’s bond were its existing seven-year notes – the 2020s – which were trading at a cash price of 94.50 at time of pricing - a yield of 7.79%.
After adjusting for the curve, fair value of the new paper was around 8.125% - indicating that the new bonds priced flat versus its initial price guidance of 8.375%.
Chinese property developers have dominated high-yield sector in the dollar space this year. The market saw sales from Guangzhou R&F Properties, KWG Property, Kaisa Group and Wuzhou International last week, generating a volume of around $2 billion, according to Dealogic data.
Tighter onshore banking liquidity and potential hikes on interest rates could continue to push Chinese developers to access offshore markets for funding, especially if they look to increase land acquisitions, say bankers. Also, financial institutions have become more selective in terms of extending bank credit, notably to high-yield credits, as the Chinese government looks to avoid the buildup of debt in the economy.
The People’s Bank of China (PBoC) pledged in its third quarter monetary policy report published in November that it will reduce leverage accumulated in the mainland economy. In 2013, overall credit rose 9.7% to Rmb17.29 trillion ($2.86 trillion) compared with 2012.
HSBC and Standard Chartered were the global coordinators and joint bookrunners of Shimao’s deal, which received a total order book of more than $2.8 billion from 188 investors. Other bookrunners include Citi, Goldman Sachs, JPMorgan, Morgan Stanley and UBS.
Cheaper funding in dollars
The higher cost of funding in onshore markets could also deter Chinese real estate developers from seeking financing in their own territory, highlight credit analysts. For example, interest rate premiums that developers are paying for loans onshore generally range from 1.1-1.15 times the PBoC interest rate, which is 6% currently, according to Barclays in a report released on January 6.
“We expect developers to continue to issue offshore bonds driven by the search for funding diversification, increased capital expenditure and refinancing,” said Christina Chiow, a Singapore-based senior credit analyst at Barclays.
Additionally, Deutsche Bank notes that dollar bonds look more attractive than CNH for Chinese developers overall.
Currently, there are 19 outstanding dim sum bonds – or CNH debt – with a total outstanding amount of Rmb33.7 billion issued by 14 Chinese developers. The weighted average yield of CNH bonds is 5.09% with an average tenor of 2.3 years. The equivalent yield in dollars is about 4.12%.
For the same group of issuers, they have issued 21 dollar-denominated bonds with an outstanding amount of $7.5 billion and an average tenor of 5.7 years. Their weighted average yield is about 7.71%. Deutsche estimates that the equivalent yield for the CNH bonds in dollars is about 5.09% for a tenor of 5.7 years.
“We therefore think dollar bonds are more attractive than CNH bonds, unless if investors have higher expectation on renminbi appreciation than the yield differential of 2.62%,” said Jacphanie Cheung, Hong Kong-based credit analyst at Deutsche Bank.
In 2013, Chinese developers – both investment grade and high-yield – issued $19.4 billion in the dollar bond market and many also tapped the loan market.
At the end of December 2013, outstanding offshore bonds – both dollar and renminbi – due 2014 amounted to $3.3 billion. Another $5.2 billion of bonds are callable this year, estimates Barclays.
