Agile Group became the latest to join a long list of Chinese property developers in issuing offshore bonds in order to capitalise on the stronger investor sentiment for high-yield credit compared to last year.
The BB/Ba3 rated residential property developer raised $500 million from a three-year senior note at the end of Thursday that was met with over $2 billion worth of orders at peak.
The 2022s, callable after two years, were offered at an initial guidance of 7% before tightening by 30 basis points during the bookbuilding process on Thursday to settle at a final yield of 6.7%, making it one of the lowest-yielding corporate bond out of the Chinese property sector so far this year.
Agile's Reg S deal was immediately followed by Zhenro Properties as the Shanghai-headquartered developer marketed a $200 million three-year issue at final guidance of 9.95% on Friday.
Both Agile and Zhenro are taking advantage of a more supportive backdrop for high-yield bonds since the beginning of the year on expectations that the US Federal Reserve will slow the pace of interest rate hikes this year.
The latest dovish statement came from US Federal Reserve chair Jerome Powell on February 26. He said that the US Federal Reserve would be “patient” before raising interest rates. And the consensus view from analysts is that the Fed will raise US interest rates a further two times at most this year, down from four rate hikes in 2018.
Since the start of the year, Chinese developers have issued over 48 offshore bonds totalling $24.4 billion; that's more than two and a half times the 35 bonds worth $9.5 billion that were issued in the last two months of 2018, according to Dealogic.
“Right now, the market window appears favourable to Chinese developers, partly due to positive investor sentiment," said Moody’s senior vice president Kaven Tsang. "Investor demand for offshore bonds has improved this year compared to late last year and we saw lots of offshore bond issuances in the last two months."
Offshore bond issuance by Chinese property firms was given a boost in January with $3 billion paper sold by China Evergrande Group. The fact that a large Hong Kong-listed developer like Evergrande, with high leverage and a reputation for poor corporate governance, could complete such a huge deal is a testament to the recovery of Asia's high-yield corporate bond market.
On average, for Chinese property bonds of similar credit quality and tenor, the coupon rates are now lower than late last year, Tsang said. In general, Chinese developers are finding it easier to issue bonds of longer tenor compared to late last year, he added.
Agile’s bonds illustrate this trend of declining coupon rates. In July last year, the Guangzhou-headquartered developer issued raised $600 million from another three-year deal at a coupon of 8.5%. That suggests the company was able to cut its funding cost by 180bp within eight months with the new 6.7% 2022s.
Let's not forget that in December last year, Modern Land (China) issued $150 million 2020 green bonds at 15.5% - the highest-ever coupon paid by a Chinese developer.
Another reason for the recent surge of Chinese developers to the offshore market includes the generous quota for offshore bonds granted by the National Development and Reform Commission, the Chinese government body overseeing bonds, compared with significantly smaller onshore bond quotas.
Also, Chinese developers find it cheaper to refinance existing offshore debt with new offshore bonds instead of onshore bonds, because they may incur foreign exchange losses when they use onshore proceeds in renminbi to repay US dollar bonds, explained Steve Wang, senior credit analyst of Citic CLSA.
What has certainly helped is the strengthening renminbi, which has lowered the costs of US dollar borrowing. The Chinese currency now trades below Rmb6.7 to the dollar compared to nearly Rmb6.9 two months ago.
Expect to see a lot more issuance this year. Chinese developers have sizeable refinancing needs this year and next. Not only did many issue bonds with a tenor of one- and two-years last year, but there also was sizeable issuance in 2015 and 2016 of three- or five-year paper with put options. These will need to be addressed too.
Moody's reckons that $40.5 billion onshore bonds and $15.7 billion offshore bonds from Chinese developers will mature or be subject to put options in the next 12 months.
Some smaller developers with limited access to the onshore corporate bond market have even capitalised on this bullish environment. These developers typically lack the support of natural buyers in the offshore bond market and may struggle to refinance their offshore maturities in one to two years if the market is no longer conducive, warned Citic CLSA's Wang.
“Investing in bonds issued by smaller property developers can be very profitable, but only after you have done sufficient analysis on the underlying credit and appreciate the risk that comes with the reward,” he cautioned.
For Agile's latest bond, the joint global coordinators, bookrunners and lead managers are Bank of East Asia, China International Capital Corporation, HeungKong Financial, HSBC, ICBC International and Standard Chartered.