China SCE Property Holdings, a Hong Kong-listed mainland property developer, returned to the international bond markets at the start of the week, selling a $200 million five non-call three-year bond.
The company turned to investors less than a week after credit ratings agency Moody’s revised its ratings outlook to stable from negative, following a bumper year that pushed its profits up by 55.6%.
But although the company's own fortunes are improving, it was by no means the perfect window to tap the bond market. Investors have, rather belatedly, become more defensive about adding dollar bonds to their portfolios, pointing to the near-certain odds of a US interest rate hike next week.
“The primary market in Asia has become less accommodating ahead of the potential interest rate hike by the Federal Reserve,” a Hong Kong-based investor told FinanceAsia. “Investors are certainly more price sensitive at this juncture because of a March interest rate hike.”
The Reg-S deal was priced at par with a 5.875% coupon, exactly in line with its initial price guidance on Monday morning. But the bonds tumbled on Tuesday morning, yielding 6.081%, according to market sources.
The rising chances of a US interest rate hike may be part of the reason for that secondary market fall, but investors also have one eye on China's 'two sessions' meetings, as a pair of annual legislative meetings are colloquially known. Chinese premier Li Keqiang punctuated the meetings with a speech on Sunday, announcing the GDP target for this year at 6.5%, the lower-end of the previous goal.
“The final pricing of China SCE looks pretty ambitious to me,” said the investor. "The sentiment has clearly shifted toward a defensive side during Beijing's Two Sessions meetings."
Looking good
Still, China SCE appeared to get more than enough demand to close a successful bond. The company and its bankers did not disclose the final deal statistics, but the bond garnered more than $700 million of orders from investors before the release of final price guidance, according to a person familiar with the company.
China SCE is likely to see contracted sales growth of between 10% and 15% this year, according to Moody’s, which predicts the company’s gross profit margins will hit around 28% in 2017.
The rating agency thinks this will be enough to give a serious bump to China SCE’s credit metrics, pushing its interest coverage — that is, adjusted Ebit/interest — to 3x over the next 12-18 months compared to 2.7x in 2016.
But the company has already seen a marked improvement in its liquidity. China SCE’s cash-to-short term debt hit 2.5x at the end of 2016, compared to just 1.6x in the middle of the year, said Moody’s.
One of the best comparables was China SCE’s own outstanding $350 million 10% July 2020 bond, which was trading on a yield of 4.34% on a yield-to-worst basis. Yuzhou Properties served as an alternative valuation benchmark for investors, although the credit rating of the company’s outstanding bond is one notch higher than China SCE's new deal.
Yuzhou, a B1/BB- rated property developer, has an outstanding $350 million 6% January 2022 bond, which was yield 5.55% prior to China SCE’s latest deal was launched.
The company plans to use the new proceeds to repay some of its outstanding debt including a $400 million club loan and a $350 million 2020 bond, which is callable in 2018.
The global coordinators of the new deal were Deutsche Bank, Haitong International and HSBC. BOCI and ICBCI joined as bookrunners.
China SCE is rated B1/B by Moody’s and S&P Global.
