China property

China Merchants Property plans $1.3b convertible

Chinese property companies are diversifying financing channels and the onshore market is gaining some strength.

Shenzhen-based China Merchants Property Development said Wednesday that it wants to raise up to Rmb8 billion ($1.3 billion) via a convertible bond issue to help finance five projects in Shenzhen, Zhuhai and Wuhan.

In a move that hints at a more relaxed funding environment for Chinese property developers, China Merchants Property said it plans to launch a six-year convertible bond issue with a coupon of less than 3%.

The deal, which is still subject to shareholder and regulatory approval, would be one of the largest onshore capital market transactions by a Chinese developer in two years, suggesting Beijing has begun to ease some of the funding restrictions imposed amid a white-hot housing market.

A case in point is China Merchant Property's failure to raise fresh equity last year. The company announced a private placement plan for $1.1 billion in September and revised the proposal twice to gain more demand amid a sluggish market. However, the deal didn't proceed in the end.

“It’s the Ministry of Land and Resources which didn't approve the private placement plan,” said a person close to the company, who declined to be named. The precise reasons for the ministry’s decision were never made clear but at the time property companies were generally subject to more rigid control, the source said.

To be sure, the funding door wasn't totally closed as some mid-and small-sized real estate developers have since successfully tapped capital markets with share placements and convertible bonds. But larger property companies did have a harder time getting the green light from regulators.

The situation has been changing since June when the Chinese government relaxed some of its mortgage policies. So this time China Merchants Property is confident of securing all the necessary regulatory approvals this time, the source close to the company said.

Investors will have the option to convert the bond into shares after six months, once the offering is completed. 

In addition to the convertible bond, China Merchants Property is also considering a domestic Rmb5 billion issue of medium-term notes. The proposal was approved by shareholders last Friday, three weeks after the government announced to support developers to issue bond financing instruments.

“Chinese property companies used to seek funds mainly from bank loans before 2010,” Kaven Tsang, an analyst at Moody’s, said. “They can [now] diversify their financing channels by issuing bonds.” 

Cheaper than offshore

The offshore market is getting tougher for Chinese property developers as investors seek higher returns to compensate for the growing risks. Agile Property, for example, recently failed to conclude a rights issue and was forced to seek a 12-month extension on its $265 million loan.

“The cost of bond issuance in the offshore market for Chinese developers has increased, compared to 2013,” said Moody’s Tsang.

In contrast, the onshore market is looking like a more attractive place to raise funds.

China Merchants Property is aiming to pay less than 3% on its convertible notes. That implies a saving of about one percentage point, or Rmb80 million, given the 4.021% coupon its Hong Kong-listed subsidiary China Merchants Land paid last December on its $500 million bond.

“The company is in its developing period and it wants to grasp the market window for more funds,” said the person close to the company.

China Merchants Property recorded home sales totaling Rmb31.3 billion in the first nine months of 2014. It is targeting Rmb50 billion of sales by year-end.

The company's share price is currently trading at about 6.6 times earnings, according to Haitong Securities, which expects it climb to about 8 times in 2015.

¬ Haymarket Media Limited. All rights reserved.
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