Hong Kong-listed property developer Future Land Development on Thursday became the first Chinese high-yield issuer to enter the high-yield debt markets since July with a $250 million two-year bond.
Supply from Chinese property credits has dropped significantly this year. International investors have been concerned about default risk, while developers have been able to raise funds much more cheaply onshore since Premier Li Keqiang allowed them to sell bonds in the domestic market from January.
This lack of supply helped Ba3/B1 rated Future Land to attract an order book of $2.7 billion, according to two sources close to the deal. Bankers said the strong response to the Reg S deal was down to cash-rich investors, ample liquidity and recovering risk appetite.
Pricing was fixed at 99.079% on a coupon of 6.25% to yield 6.75%. Initial guidance had been around the 7.25% area.
“Most of the demand came from private banking clients and asset managers - traditionally the major buyers,” said one banker familiar with the transaction. “Demand was also helped by the fact that supply has been tight this year.”
Future Land already has two outstanding bonds: a 10.25% January 2018 note callable in January 2016 and a 10.25% July 2019 note callable in 2017. The shorter dated note was trading on Thursday at a bid price of 105.75% to yield 6.793%, while the longer dated tranche was trading at 108.38% to yield 7.158%.
Analysts commented that pricing of the new deal still leaves some yield on the table for secondary market performance.
Syndicate bankers added that two other comparables comprise property developer CIFI Holdings' 8.875% 2019 bond and Yuzhou Properties’s 2018 8.75% bond.
The former deal has a B+/B1 rating and was trading on Thursday at a bid yield of 6.342%, while the latter has a B/B1 rating and was trading at 6.262%.
JP Morgan, Bank of America Merrill Lynch, BOC International, Guotai Junan International and HSBC are the joint bookrunners of the transaction.
In its rating assessment, Moody’s said Future Land’s new issue will improve the company’s debt maturity profile and lower its overall funding cost as most of the proceeds will be used to refinance higher cost debt.
Moody's expects that the company’s revenue/debt and EBIT interest coverage ratio will stand around 120% and three times respectively over the next 12 months.
Declining high yield issuance
According to figures from Dealogic, high-yield debt issuance from Asia ex-Japan amounts to $9.9 billion via 30 transactions year-to-date compared to $22.2 billion from 68 deals over the same period last year.
Of this amount, Chinese developers have raised $9.8 billion from 23 international bond offerings, down sharply from the $18.4 billion raised from 42 deals over the same period last year.
“Many Chinese property developers have been tapping China’s domestic interbank bond market because funding is cheaper,” said Ken Lee, managing director at Hong Kong-based credit fund Ark One. “Offshore supply will continue to be weak.”
“I expect offshore yields for the sector to drop further but I’ll be very careful on credit selection,” he added.
Prior to its latest fundraising, Future Land was last in the market with a Rmb3 billion ($473 million) five-year domestic bond. This carries a coupon of 4.5% and is callable at the end of the third year. The developer raised $265 million from a Hong Kong listing in 2012.
ICBC returns in dollars
ICBC, China’s largest bank by assets, was also back in the bond markets on Thursday with a split three- and five-year offering.
The A1/A rated credit raised $300 million from a November 2018 bond, which was priced at par on a coupon of 2.157% to yield 100bp over Treasuries. Initial guidance had been at 130bp over before being tightened to between 100bp and 105bp over.
A $700 million five-year tranche was priced at par on a coupon of 2.905% to yield 125bp over Treasuries. This tranche was initially marketed at 150bp over.
Bankers calculated fair value for the three-year around 115bp to 120bp over Treasuries and 130bp over for the five-year.
ICBC’s closest comparables are its 2% May 2018 bonds and 2.625% May 2020 bonds. The shorted dated issue was trading on a G-spread of 103.5bp, according to Bloomberg, and the longer dated issue on a G-spread of 120.6bp.
Analysts report accelerating momentum behind Chinese names, evidenced by the strong secondary market performance of bonds this week for Shandong Gold and ICBC Leasing.
A1/A/A rated Shandong Gold priced a $300 million three-year SBCL deal backed by Bank of China on Wednesday at 162.5bp over Treasuries. The deal was trading 20bp tighter by Thursday’s close.
ICBC Leasing’s multi-tranche deal has also traded in since launch on Tuesday. The $500 million three-year was trading on a G-spread of 154bp over on Thursday compared to an issue spread of 172.5bp and the $700 million five-year at 177.3bp compared to an issue spread of 187.5bp.
Joint global co-ordinators for ICBC's deal were Bank of America Merrill Lynch, Citi, BNP Paribas and Wells Fargo.