With a strong reception for its B-rated bonds, Central China Real Estate has proved that high-yield credits from the China property sector are still in demand. Taking advantage of a relatively quiet period in the primary market recently, the Reg-S/144A notes attracted $1.8 billion of demand from 150 accounts -- the largest ever order book amassed by a single-B-rated Chinese property name. The deal size was set at $300 million, meaning the issue was six times covered.
The five-year notes were issued with a 12.25% coupon and were re-offered at par for a yield of the same amount. The bonds mature on October 20, 2015 and are callable after three years.
The most obvious reference point for investors when CCRE announced its deal was Kaisa Group ($350 million 13.5% five-year), Powerlong Real Estate Holdings ($200 million 13.75% five-year) and KWG Property ($250 million 12.5% seven-year) – all single B credits issued earlier this year. At the time, these issuers were all trading at a yield around or just below 13%, according to the CCRE bookrunners (Deutsche Bank, ING and Nomura).
However, CCRE stands out from its peers because it is sponsored by Singapore's largest real estate developer, CapitaLand.
"For investors this was a reinforcement that corporate governance, which is an important factor, is in place,” said one banker. As a result, the notes attracted a strong bid from institutional accounts, with fund managers receiving 77% of the sale.
This is significantly more than the usual distribution of similarly-rated high-yield bonds from the property sector, which have attracted a strong bid from retail accounts, particularly private banks. On this occasion, private banks accounted for only 5% of the allocation. The rest of the bonds were sold to banks (7%), insurance accounts (10%) and other types of investors (1%).
Geographically, the bulk of the demand came from Asia-based accounts, which took 58% of the deal. European investors took 29% and US accounts 13%.
This should not be all too surprising given that CCRE’s operations are concentrated in Henan province. From the outset this may have posed a level of concentration risk, but, as one banker put it, “when investors understood the credit better, a lot of them saw this as upside (potential) given the size of Henan province”.
One source familiar with the trade said CCRE's 18-year operating track record was an attributing factor to the general confidence displayed by investors. This too differentiated the credit from its peers, which tend to have much shorter operating histories. The bonds also priced at a time when there is less uncertainty over the regulatory environment in China and as market volatility has begun to taper off.
As of noon on Thursday the new bonds were trading three points above par, resulting in a yield of 11.4%. The yield continued to drop on Friday and the bonds finished the week at 11.05%, which is equivalent to a cash price of 104.5. By comparison, the Kaisa 2015s were quoted at 12.4% on Thursday and 12.32% on Friday, while Powerlong moved in from 12.6% to 12.49%, and KWG’s 2017 bonds tightened from 10.6% on Thursday to 10.5% by the end of trading Friday.
CCRE will use of proceeds to fund new property projects and for general corporate purposes. The notes have been rated B1 by Moody’s and a B+ by Standard and Poor’s.