Country Garden blooms with $3b equity combo

High-flying homebuilder fires on all cylinders for fresh capital – raising $3 billion in equity just a week after pulling nearly $1 billion from bond sales.

Country Garden stunned the market on Tuesday by raising a whopping $3 billion from an equity combo that became easily the biggest deal of the year so far, as the high-flying Chinese property developer makes big moves to restructure its balance sheet at the start of the year.

Tuesday’s equity deal included a HK$15.6 billion ($2 billion) convertible bond offer and a $1 billion top-up placement of shares in the Guangdong-based developer, which saw a significant improvement in its business performance and financial stability last year.

Even on a standalone basis, either of the two deals would easily overtake Hongqiao’s $800 million share sale to become the biggest equity deal so far this year. In particular, Country Garden’s $2 billion convertible bond is the largest equity-linked transaction since Softbank’s $5 billion exchangeable securities into Alibaba in June 2016.

Market participants were generally surprised by Country Garden’s jumbo offering because the developer had raised $850 million from a dual-tranche senior note just a week earlier. The developer also announced a Rmb1.8 billion ($280 million) medium-term note issue on the onshore bond market on Tuesday, and is expected to price the deal next week.

Together, these deals will add some $4.1 billion to Country Garden’s coffers and about 22% to its cash holdings of $18.4 billion – in a matter of just two weeks.

But perhaps more importantly, the strategy to raise funds from multiple channels means the developer is now able to diversify its shareholder base. In particular, the company has not seen equity-linked specialist funds among its shareholders since its maiden $500 million convertible bond matured in 2013.

High-flyer

Country Garden was a local, mid-sized developer when it listed its shares in Hong Kong 11 years ago. But it has now emerged as China’s largest developer after reporting contracted sales of Rmb550 billion last year, overtaking property heavyweights such as Vanke, Evergrande and China Overseas Land & Investment (Coli).

Its strong business profile was reflected in its stellar share price performance last year; its shares more than tripled from HK$4.34 from the beginning of the year to HK$14.9 by year-end. The shares have risen a further 18% this year.

Last year also saw Country Garden securing an investment grade rating for the first time since it became a listed company. In September Fitch raised the company’s long term rating to BBB- from BB+, saying that its diversified land bank in China could help it sustain stable sales performance throughout various business cycles.

Indeed, Country Garden’s strong performance last year could be attributed to its large exposure to tier three and four cities, which faced less stringent home sales restrictions and mortgage financing conditions than bigger cities. Yet the company has been building up its land bank in bigger cities, which typically generate higher profit margins for home sales.

The developer said it had Rmb1.2 trillion of saleable land properties in tier one and two cities in the pipeline.

Equity Combo

Country Garden appears to have aimed for a quick settlement of the fundraising exercise, picking an expedited format for both the share and the bond sale.

Tuesday’s share sale was structured as a top-up placement that involved 460 million shares, which was equivalent to about 2.2% of the company’s enlarged share capital. By choosing the top-up route, the company was able to save the time of documentation that typically takes one or two weeks for new share issues.

The shares were offered at a fixed price of HK17.13 per share, representing a discount of 3.7% to Country Garden’s Tuesday close at HK$17.78.

Concurrently, the developer was able to raise short-term interest-free capital from a $2 billion convertible bond issue through its offshore subsidiary Smart Insight International, the same issuing entity of its dual-tranche senior note last week.

The new bond is denominated in Hong Kong dollars and matures 363 days after settlement – an increasingly common structure for bond issuers since last year. It is used to skip the approval process with China's National Development and Reform Commission (NDRC). The top economic planner has requested offshore issuers seek prior approval if the security has a maturity profile of over a year.

The 363-day structure was used by convertible bond issuers such as Zhongsheng Group, as well as in the straight bond market by the likes of HNA Group and Maoye International.

Other terms of the new bond include 0.75% yield-to-maturity (marked at 0% to 0.75%) and a 20% conversion premium to the offer price of the share placement at HK$17.13 (marketed at 20% to 30%). The final conversion price is set at HK$20.556.

One bond trader told FinanceAsia the decision to reference the conversion price to the share sale instead of the stock’s close price was investor-friendly. Investors subscribing to the new bond were effectively getting a conversion premium of 15.61% against Tuesday’s HK$17.78 closing price.

However, investors could face slightly higher risk for buying into the ultra short-dated bond that did not get any NDRC approval.

“Prominent companies like Country Garden should be able to get offshore bond quota easily,” the trader commented. “Going without an official approval will always be a concern.”

Still, the new bond is clearly favourable to investors judging by the high volatility of the stock and the strong run since the beginning of last year. The relatively moderate 20% conversion premium makes it an attractive deal considering that the stock has already gained 18% within a month.

For the issuer, conversion will not imply heavy dilution since the potential new shares account for only 3.57% of its existing share capital.

Head start

Country Garden’s large fundraising exercise should give it a head start against other property developers when it comes to land acquisition and property development this year.

This is based on the fact the company already has one of the strongest balance sheets among top Chinese developers. Its net gearing is expected to fall to around 38% from 55% after the equity raise, ranking it the third least leveraged Hong Kong-listed property developer behind Vanke and Coli.

It is worth noting that the transaction is a coup for Goldman Sachs, which underwrote both the share sale and the convertible bond issue on a sole basis.

The US investment bank was not part of the syndicate when Country Garden conducted its initial public offering in 2007. But it was a joint bookrunner on both of the company’s equity raises in 2012 and 2014 alongside JPMorgan.

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