Chinese developer Times Property sold a $280 million five-year bond callable in year three on Monday, buoyed by improving sentiment towards the Chinese housing sector and a stronger macroeconomic backdrop for the nation.
Its B2/B/B+ rated Reg S issue was priced at 99.35% on a coupon of 11.45% to yield 11.625% according to a term sheet seen by FinanceAsia.
Pricing came 25 basis points inside initial guidance around the 11.875% level, while the issue size was $30 million larger than initial indications for a $250 million deal.
The order book closed around the $1 billion mark from 100 accounts, supported by reverse inquiry demand and the secondary market performance of Ba2/BB+/BB+ rated Country Garden, which priced a $900 million five non-call three bond last Thursday. Having been priced at par, the deal ended its first day trading up nearly half a point to 100.35%/100.5%.
Asian investors subscribed to 90% of the notes, whilst the rest went into European accounts. Fund managers purchased 80% of the paper, followed by private banks with 15%, and banks and others 5%, according to a source close to the deal.
Investor sentiment towards China was spurred over the weekend by a central bank rate cut and above-consensus manufacturing data.
The People’s Bank of China cut benchmark lending and deposit rates by 25bp to 5.35% and 2.5% respectively on Saturday. The last 25bp rate cut was less than three months ago on November 22.
“We believe the rate cut provides further evidence of the central government's support for the economy, underpinning a healthy property sector,” said Charles Macgregor, head of Asia at independent credit firm Lucror Analytics.
The HSBC/Markit Purchasing Managers Index (PMI) also edged up to a seven-month high in February, climbing from 49.7 to 50.7 - just above the 50-point level that separates growth in activity from a contraction.
Against this backdrop, the Barclays Asia high-yield index gained 0.4% to 151.4 on Monday, according to Lucror Analytics. The Asian high-yield market had a strong session, with bond prices moving up 0.25 to 0.75 points.
Breaking the China property drought
The supply of new, property-related bonds stagnated in January after Shenzhen-based developer Kaisa Group almost defaulted on its debt.
Only one bond was sold that month - a $1.2 billion issue for Sino-Ocean Land. By contrast, Chinese property developers raised $5.55 billion in January 2014.
Then in February, Shimao Property and Evergrande (the first single-B Chinese developer to raise a high-yield offering in 2015) chose to opportunistically issue dollar bonds totalling $800 million and $1 billion, respectively, as concerns about Kaisa dwindled on expectations that fellow developer Sunac would buy a stake in the troubled developer.
According to Dealogic data, there has only been $2.9 billion of Chinese property high-yield issuance so far this year from four bonds. This is a significant dip from the $11.3 billion raised from 34 deals over the same period last year.
Comparables
The nearest comparable for Times Property’s new bond is its outstanding 12.625% March 2019 issue, which is callable in 2017 and was trading on a yield-to-worst (YTW) – the lowest yield an investor can expect when investing in a callable bond – at 11.21% on Monday, according to a source familiar with the matter.
Other comparables include Yuzhou Property’s 9% December 2019 bond and CIFI Holding’s 8.875% January 2019 bond. These were trading on a respective YTW of 9.4% and 8.5% on Monday.
One credit analyst estimated fair value for Times Property’s new bond at 11.4%, indicating a new issue premium of 25bp.
“We view this as an important issue, which will provide a good gauge of investor appetite for smaller single-B property developers,” said one source close to the deal.
Speaking ahead of pricing, Mark Read, fixed income analyst at Mizuho also commented, “If this bond prices at 11.5% or better, it may well perform in secondary – helped by the weekend’s positive China macro headlines and a scarcity of high-yield supply.”
Improving credit metrics
Times Property is a small-to-mid sized Guangdong-based developer with a focus on mass-market residential urban redevelopment properties. Housing sales contribute the bulk of the company’s revenues (96.9% in financial year 2014), with the remainder derived from leasing (1.9%) and property management (1.2%).
During the company’s recent results announcement, executives told investors they intend to bring gearing down below 90% during the course of 2015. During roadshows for the new bond, the company further highlighted its improving credit metrics, with net debt to total equity down from 120% in 2012 to 94% in 2014.
The company’s Ebitda/total interest expense ratio has also improved from 1.5 times in 2012 to 3.4 times in 2014.
Proceeds from the latest offering will be used to refinance outstanding debt and finance existing and new property development. Some 42% of the company’s debt is now due in three to five years compared to only 9% in 2012.
Short-term debt of less than one year has simultaneously been reduced from 56% in 2012 to 17% in 2014.
Joint global co-ordinators for the new bond deal are BOC International, Haitong International and UBS. Joint lead managers comprise ABC International, Bank of America Merrill Lynch, BNP Paribas, JP Morgan and Morgan Stanley.
The next likely Chinese issuer will be cement company China Shanshui, which launched roadshows for a Reg S deal on Monday. BOC International, Credit Suisse and Morgan Stanley are joint bookrunners of the proposed dollar bond, with proceeds being used to re-finance existing debt.
