China high-yield deals pulled

Baoxin and Zhengtong failures dash hopes of high-yield bond revival

High-yield bonds for Baoxin Auto and China Zhengtong Auto are postponed as markets stall amid Greek woes, widening spreads and fears of a hard landing in China.
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A China Zhengtong Auto dealership
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<div style="text-align: left;"> A China Zhengtong Auto dealership </div>

Baoxin Auto and China Zhengtong Auto postponed their debut in the dollar bond market on Wednesday — a move that came as little surprise to bankers who had speculated that both deals would be pulled after they failed to price last week. Both companies cited the unfavourable market conditions as reasons for their postponement in statements posted to Hong Kong’s stock exchange.

Their failure to close douses hopes of a revival of China’s high-yield market. So far this year, only a handful of Chinese issuers, such as China Shanshui Cement, Agile Property and KWG Property, have priced high-yield bonds. Given the sell-off in the market, few issuers are expected to launch deals.

“The macro backdrop has become much weaker,” said Arthur Lau, head of fixed income Asia ex Japan at Pinebridge. “We have seen Chinese high-yield bonds sell off by three to four points since late last week. There are also concerns of a hard landing in China as the recent numbers have been weak. I expect that the Chinese high-yield market will stay quiet in the next few months and companies in new sectors without proven secondary bond performance will struggle to raise funds.”

Although the Chinese auto sector seems far removed from the European debt crisis, the events in Europe are clearly affecting market sentiment in Asia.

“Issuance in the Chinese high-yield sector will depend on sentiment and will be affected very much by what is happening in Europe, rather than any real fundamental reasons,” said Bryan Collins, portfolio manager at Fidelity. “However after the recent sell-off, cheaper secondary pricing on existing high-yield bonds will hamper new issuance in the near term.”

While the market rout certainly played a part in both deals being pulled, the fact that both companies were operating in the unfamiliar auto dealership sector certainly made it more challenging. The sector is viewed by investors as being competitive, fragmented and asset light. It did not help that the bonds were in the market at the same time, and there were suggestions that investors needed more time to look at the credit.

Zhengtong had announced its five-year bond early last week with guidance at high 11% through sole lead J.P. Morgan. The deal was expected to raise about $300 million to $350 million. Shortly after that, Baoxin Auto had announced a very similar five-year deal, also at high 11%. Morgan Stanley and UBS were joint arrangers for the latter. 

Zhengtong and Baoxin are similarly rated Ba3 by Moody’s and BB- by Standard & Poor’s (S&P). They both sell BMWs, Audis, Land Rover and Jaguars, though China Zhengtong has a wider selection of cars. “Both companies sell the same cars and came to the market at the same time. It was a recipe for disaster,” said one banker away from both deals.

Sources defended the decision to market a deal on top of Zhengtong’s sale. “We felt that Baoxin was a superior credit,” said one source. “If Zhengtong were to price first, they would take liquidity away and set a benchmark and it would be very hard to persuade investors to accept lower pricing for a similarly rated company. Given that it is a 144a deal and the company’s financials would soon be stale, we wanted to bring it to market quickly. Having now completed marketing the deal, we can bring it back the moment markets return after the summer.”

For Rule 144a transactions — which are offered to professional investors in the US — auditors will not sign off on accounts that are more than 135 days old. As Baoxin does not report quarterly earnings, its most recent accounts were for its year ended December 2011 and as more than 135 days have elapsed, those accounts are now stale. Assuming it still wants to tap the US investor base, the soonest it can return would probably be sometime in July, after it reports its half-year results.

Bankers expect the market to slow down in coming months as many companies will need to wait until they report half-year earnings if they want to tap the US market.

Zhengtong and Baoxin were both very similar, but as pointed out in a Moody’s report comparing the two companies on Monday, Zhengtong had greater scale after buying another distributorship, Top Globe, in December 2011. In contrast, Baoxin has a better financial profile and less debt.

Zhengtong had planned to use the bulk of its proceeds to refinance existing debt, while Baoxin had earmarked at least $100 million for the repayment of bank loans and the rest to expand its network of dealership stores and repair centres.

Feedback from some investors had suggested that they preferred Baoxin, although the latter has only been listed since December 2011. Investors were apprehensive about Zhengtong’s risk appetite, as the company had recently taken on a large acquisition.

Interestingly, the stocks had very different responses to the news of the bond being postponed. Baoxin’s stock plunged nearly 24% to HK$6.09, its lowest price since listing, while Zhengtong’s stock fell just 4.7%. One observer attributed this to the fact that Baoxin needed the funds from the bond to expand its dealership business, whereas Zhengtong had already made its acquisition and needed to refinance debt.

In its statement to the exchange, Zhengtong had said the bond was intended to take advantage of the “favourable interest rate environment” to raise funds for repayment of short-term bank loans and for expansion and working capital. It added that the postponement of the bond issue “shall have no material adverse impact on the financial and operational position of the company”.

Meanwhile, the Moody’s report also pointed out that the company has more than Rmb2 billion in IPO proceeds.

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