A tale of two property bond issues

Longfor Properties and Kerry Properties both tapped the dollar bond market at the end of last week, but they experienced contrasting fortunes.
Longfor chairwoman Wu Yajun ranked eighth among the richest people in China by Forbes in October 2010.
Longfor chairwoman Wu Yajun ranked eighth among the richest people in China by Forbes in October 2010.

The end of last week saw continued bond issuance from Asian property companies. But the two transactions, one high-yield and one investment grade, were a contrast in demand and performance.

Longfor Properties

First, the winner. Longfor Properties, a leading mainland Chinese firm, raised $750 million in a heavily subscribed five-year deal on Thursday.

The Regulation-S/144a issue pays a 9.5% semi-annual coupon and was re-offered to investors at par. The final maturity date is April 7, 2016, but the issue can be called by Longfor at 104.75 and 102.375 after three and four years respectively.

The senior unsecured notes are rated BB by Standard & Poor’s and Ba3 by Moody’s. Both credit agencies lowered the issue's rating a notch below the company's family rating because of its subordination to secured debt raised on the Chinese mainland. The issue contains standard high-yield covenants, placing restrictions on asset sales and further borrowings.

So far this year, Chinese property companies have raised more than $3 billion dollars from six issues, which compares with $6.45 billion from 16 deals during the whole of 2010, according to data provider Dealogic.

The global coordinators for this transaction were Morgan Stanley and Standard Chartered, while Citi and HSBC acted as joint bookrunners. A two-team company roadshow visited Hong Kong, Singapore, London, Boston and New York on March 28, 29 and 30, and by the end of their tour, orders worth about $1 billion had already been received, according to a source familiar with the deal.

On Thursday morning, the bankers approached investors with formal price guidance of a 9.75% yield, which was tightened to a range of 9.5% to 9.625% by midday as the order book continued to grow. An obvious comparable bond was Agile Property’s 2017 issue, which was yielding around 9.25%.

The proposed size was initially $400 million to $500 million, but that was later raised to $750 million. The yield was fixed at 9.5% in the early hours of Friday morning (Hong Kong time).

In the end, the orderbook exceeded $7 billion and was made up of more than 300 orders. Asian investors led that demand, and were allocated 76% of the notes; 14% was placed in the US and 10% in Europe.

Private banks provided a strong bid, as has become usual for high-yield issues by Chinese companies that can boast solid financial ratios, significant market presence and, not least, name recognition. They bought 43% of the issue – possibly anchored by a large purchase by a local family firm. Some 46% was sold to fund managers, 7% to commercial banks and 4% to non-financial companies.

The notes swiftly traded up to a three-quarter-point premium in the secondary market on Friday morning, and then surged to 102 as under-allocated investors lifted their holdings. The bonds settled at 101 by the end of Asian trading.

Longfor has a well-established market position in China's residential and commercial property market, especially in Chongqing, Chengdu, and Beijing. The company was set up in 1994 and listed on the Hong Kong stock exchange in November 2009. It is majority-owned and controlled by its chairwoman, Wu Yajun, and her associates.

The bonds “are consistent with Longfor's funding plan in 2011 and will improve the company's liquidity and debt maturity profile against the tight bank credit conditions likely to prevail in China in 2011”, Moody’s analyst Kaven Tsang said in a March 25 note.

The net proceeds from the issue will be used to finance existing and new property projects and for general corporate purposes.

Kerry Properties

Compared to the Longfor deal, the response to Kerry Properties' bond issue was less than enthusiastic.

The Hong Kong-listed firm, whose major shareholder is the family of Malaysian businessman Robert Kuok, raised $300 million on Thursday via a special purpose vehicle called Wiseyear Holdings.

The 10-year Regulation-S issue is rated BBB- by Standard & Poor’s and was launched from the firm’s medium-term note programme. The joint lead managers were BOC International, Deutsche Bank and HSBC.

The notes pay a 5.875% semi-annual coupon, and were re-offered at 99.537 to yield 5.937% to a maturity date of April 6, 2021. That was equivalent to 250bp over the benchmark US Treasury yield.

The total order book was a mere $500 million, made up of just 46 accounts. Asian investors bought 90% of the issue and the remaining 10% was placed in Europe. By investor type, the bonds were evenly distributed, with fund managers taking 32%, insurance companies and commercial banks each buying 25%, and private banks ending up with 17%. The remaining 1% was sold to “other” investors.

In addition to the modest interest, the secondary market performance also indicated that the deal was mispriced, as the spread soon widened to more than 260bp. According to bankers who didn’t participate in the deal, the borrower had intended to raise up to $500 million, but clearly it was also fixated on achieving a pricing that had little market support. In the issuer’s defence, a source closer to the transaction blamed a spoiler research note released by a bank analyst shortly before launch.

The large volume of property bond issues in recent months meant that the issue was likely to struggle if it failed to offer investors a generous enough yield, particularly as 10-year US Treasury yields have been rising. But it seems Kerry wasn’t prepared to give much away to investors, and the issue offered an insufficient premium to Henderson Land’s 2019 notes.

As Jacob Samuel, a credit analyst on Nomura’s sales and trading desk, said: “Simply, the issue was expensive, it was priced too tightly.”

More optimistically, another banker said that the "proof will be where it eventually settles”.

Photo provided by AFP.

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