Chinese developers' bonds boosted by rate cut

Logan Property and Yuzhou Properties collectively raise $500m, while China Sunac markets a five-year callable bond.

Chinese developers Logan Property and Yuzhou Properties each raised a $250 million bond on Monday night, taking advantage of improved investor confidence in the country's property sector following the recent rate cut from People’s Bank of China.

Logan priced its three-year offering at 9.75%, which is 25 basis points tighter than its initial price guidance, while Yuzhou priced its five-year note callable in year three at 9%, which is also 25bp tighter that initial price guidance, according to term sheets seen by FinanceAsia.

“The PBOC cutting rates caused a rally in Chinese credit, especially with property bonds,” said a source familiar with the matter. “There are rumours that there’s going to be lots of supply in January and some issuers are being proactive now.”

The Chinese central bank, for the first time since July 2012, reduced its benchmark one-year lending rate by 40bp to 5.6% on November 21 and cut the one-year deposit rate by 25bp to 2.75%.

This sent encouraging signals across the Chinese property sector, with rating agencies saying its credit positive because the rate cut will likely support real estate sales and reduce developers’ borrowing costs.

“The rate cut should spur residential property sales in the next few months in conjunction with the PBOC's mortgage-policy relaxation on September 30,” wrote Franco Leung, credit analyst at Moody’s in a report released on November 24. "Buyers' expectation that borrowing costs will decline will likely encourages them to purchase homes, which will boost sales volumes for developers.”

Yields on US dollar property bonds in Asia ex-Japan fell 16bp last week to 6.34% as of November 26, the lowest since September 9, according to JP Morgan Indexes. Also, spreads on Chinese dollar-denominated bonds narrowed 3.29bp last week to 323.87 as of November 26, the biggest tightening since the first week of the month.

Asian high-yield credit ended last week on a strong note with solid volumes being traded. Most names, including Chinese property, ended the week one to 1.25 points higher than the week before, according to Lucror Analytics, an independent credit specialist firm.

Developer Sunac China is the latest developer to market a debt instrument, launching a five-year bond that is callable in year three on Tuesday morning. The initial price guidance is around the 9% area.

HSBC is the global coordinator and joint bookrunner of Sunac’s deal, which is likely to price Tuesday. Other bookrunners include Citi, Credit Suisse, ICBC International and Morgan Stanley.

The last time two or more Chinese builders marketed dollar bonds was May 27, when Logan Property raised a $300 million five-year note callable in year three and Vanke Real Estate sold a $400 million five-year offering, according to Bloomberg bond data.

Logan and Yuzhou

Logan Property’s latest bond received a total order book of $1.1 billion from more than 100 accounts, of which 77% went to Asian investors and the rest to European investors, according to a source close to the deal.

Fund managers purchased 63% of the notes, followed by private banks with 20%, banks with 13%, and insurance and corporates with 4%. Proceeds of Logan’s issuance will be used to refinance existing debt and for other general corporate purposes.

Yuzhou’s offering, on the other hand, obtained a total order book of $800 million, of which 94% of the paper went to Asian investors and the rest to European investors, added the source.

Banks subscribed to 41% of the bond, followed by fund managers with 40%, private banks with 17% and other institutions with 2%. Proceeds of Yuzhou’s bond will be used to refinance existing debt, fund potential land acquisitions and for general working capital purposes.

Chinese property accounts for 10% of total Asia ex-Japan dollar-, euro- and yen-denominated bond issuance, which currently stands at $209 billion year-to-date, according to Dealogic data. This is smaller than last year’s 13% share of total volume, which stood at $145 billion during the same period.

Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan and VTB Capital were the joint bookrunners of Logan’s deal.

BOC International, Credit Suisse, Haitong International, HSBC, Huatai Financial and JP Morgan were the joint bookrunners of Yuzhou’s transaction. 

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