KWG Property pulls perp, Cheung Kong goes ahead

KWG Property pulls perp, Cheung Kong goes ahead
KWG Property's W Hotel project in Gaungzhou

Asian perpetual bonds hit resistance from investors this week amid a softening market. Chinese property company KWG Property last night pulled its US dollar perpetual, according to two sources.

The company had started marketing the perpetual bond, which is callable after five-and-a-half years, with an initial guidance of 10.25% on Tuesday. At the end of that day, investors were told that books were covered. It was expected to price on Wednesday, but sentiment towards perpetuals from Chinese property companies had soured by then.

This was in part due to the poor secondary performance seen by Agile Property’s bonds. The company late last week sold a $700 million perpetual, which was heavily allocated to private banks. Those bonds were quoted at 97 on Wednesday, down three points. This, along with the glut of Chinese property names, clearly affected sentiment.

“The market is much, much softer,” said one banker. “There is indigestion in the market especially for riskier instruments.”

As with all perpetuals, investors face the risk of holding the bonds forever. KWG Property’s perpetual used a so-called cliff structure, or staggered step-up, to avoid a legally binding replacement capital covenant.

The structure was first used for investment grade name Li & Fung and subsequently by Agile Property when it priced its perpetual last week. KWG Property’s perpetual had a step-up of 25bp from year 10.5 and another 75bp step up from year 20.5. But the 25bp step-up at year 10.5 was seen as far too small to incentivise the borrower to call the bonds. KWG Property’s perpetual would have lost all equity treatment from the rating agencies after year 5.5.

“Clearly the step-ups on new format perpetuals from high-yield property companies are not punitive enough to act as an incentive for the issuer to call,” said one regional credit analyst. “Also, the market’s focus on rating agency equity treatment for perpetuals is confusing call-incentives for high-yield issuers with those of the traditional investment-grade issuers.”

Institutional investors clearly did not like the product. “You have to look carefully at the structure of these perpetuals from Chinese property companies,” said one fund manager. “You could get stuck holding a low yielding bond forever as rates start to rise,” he added.

In the end though, investors pushed back and the company chose to pull the deal. “There was an order book but it was a question of pricing and the company decided that it did not want to go ahead, given where they are in terms of funding,”

Citi, Goldman Sachs, HSBC, ICBC International, Standard Chartered and UBS were joint bookrunners.

Cheung Kong Holdings
In contrast to KWG Property, Cheung Kong Holdings last night priced a $500 million senior perpetual. The perpetual is callable after five years and was marketed at the mid-5% area. The final guidance was 5.375%-5.5%, with the bonds pricing at 5.375%.

As of last night, there were no distribution statistics available and given the difficult market backdrop for perpetuals, various bankers on the street were wondering if the bonds had indeed been placed out and who might have bought the bonds. Earlier, during the bookbuilding, the deal was covered however, according to a source.

According to statistics released this morning, books were covered with over 60 accounts. No size of the orders were released. Private banks took 60%, asset managers 36% and companies and other investors 4%. Asian investors were allocated 86% and European and offshore US investors were allocated 14%.

Cheung Kong Holdings is the flagship of the Cheung Kong Group, and the holding company for Hutchison Whampoa, Cheung Kong Infrastructure and Power Asset Holdings. However, unlike Hutchison Whampoa which tends to issue $1 billion type transactions, Cheung Kong Holdings has typically issued small, tightly priced deals that appear to be backstopped — and speculation was that this was the case for its latest deal.

“Cheung Kong Holdings has had a history of smallish backstopped deals that price very tightly — either through the curve, or close to secondary levels,” said a source. “We have not heard much interest from accounts on this perpetual and the technicals are not supportive,” he added. “The perpetual has a fixed-for-life structure. Such products are very sensitive to rates rising and, if they do, it will be hard to get rid of the bonds. It will be interesting to see how it trades tomorrow.”

This morning, the bonds were bid at 97, down three points in secondary markets.

Cheung Kong Holdings issued a S$500 million senior perpetual through DBS and J.P. Morgan in September 2011 and subsequently added another S$230 million via DBS. It also printed a HK$1 billion senior perpetual via DBS in June last year. The structure of its dollar perpetual was similar to the Singapore dollar perpetual.

Barclays and Bank of America Merrill Lynch were joint bookrunners, and one banker described this as an “unusual choice” — given that neither of them are house bankers to Cheung Kong.

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