Country Garden falls victim to volatility

Further deterioration in the markets leads the underwriters of Country Garden's ambitious $1.5 billion deal to delay the offering.
Country Garden's $1.5 billion bond deal, which would have been the largest offering ever by a Chinese property developer, has been delayed following a further deterioration in markets on the back of rekindled concerns regarding the US subprime crisis.

ôMarkets are challenging. Any issuer now has got to watch the markets and wait for things to stabilise before they determine how, when and if they approach the markets,ö says a syndicate banker not involved in the trade.

Bookrunners Bank of China, Citi, Deutsche Bank, JPMorgan, HSBC, Morgan Stanley and UBS had already announced on Wednesday that the company was likely to price a $1 billion bond, instead of the $1.5 billion offering expected by market watchers. In addition, the leads increased the yield guidance on the five-year and 10-year tranches to 9.25% and 10% respectively, compared to a prior guidance of 9% and 9.75%, due to worsening credit conditions.

But early Tuesday afternoon, demand for Country Garden reportedly amounted to $800 million, reaching $1.2 billion by London open.

"On a decent day of US trading, it could have pulled off a deal - perhaps not $1 billion but it would have been pretty close. But it just got slammed," says a source.

Negative headlines overnight included the announcement of a $39 billion loss by General Motors in the third quarter and Morgan Stanley reporting write-downs of $3.7 billion.

So were bookrunners too slow in pricing the deal? Commentators are always talking about the narrow market windows that bond issuers have to seize. "Country Garden isn't an easy credit to sell, since this would have been its maiden offering,ö says a source. ôWell-known borrowers will have an easier time in these kind of markets because they can get in and out a lot quicker. In this case, the issuer was not in a position to scrimp on the credit work and the window slammed shut in the process."

That said, there are several well-known Korean banks that were expected to issue over the coming weeks. Those that have allocated mandates include: Kookmin (Baclays, Citi, Merrill Lynch); Woori (Credit Suisse, Merrill Lynch, Woori Securities); and KDB (Citi, Depfa Bank, Deutsche Bank, Goldman Sachs and HSBC). These deals are now reportedly on hold. Some sources say that KDB was advised to bring a deal to market the week before last and could have realistically priced within one or two basis points of Kexim. The bank chose not to (for reasons unknown) and that opportunity is currently lost.

ôKorean banks are very price sensitive. In some of these cases, they donÆt need the money (opportunistic financing), or they can just get it later. I donÆt expect these deals to come to market anytime soon.ö

Meanwhile, the issuance outlook for Korean corporates such as SK Energy (Goldman Sachs, Morgan Stanley) and Hyundai Capital (Citi, Deutsche Bank, Morgan Stanley, JPMorgan, and Goldman Sachs) doesn't look promising either. Hyundai was reportedly considering an offering in the 140bp over mid-swaps area, but that forecast had already substantially widened by Tuesday afternoon, before the US sell-off. "Hyundai definitely won't be able to stomach these price premiums," says a source.

ôThe markets are bad, but things could quickly change and markets might stabilise soon,ö says one syndicate banker. Another comments: ôIf issuers see a bit of stability and some liquidity in secondary trading, they might consider a new trade, although I donÆt think a window is likely to open before the beginning of the week after next.ö

But Singaporean chip tester and assembler UTAC's $475 million eight-year non-call four high-yield deal (managed by JPMorgan, Merrill Lynch and ABN AMRO) that was due to price on Thursday, anticipate the deal will price next week.

"This is a bought deal (therefore guaranteed to price) and is not really indicative of the broader market. It's just a question of how much, and what price, and to whom," says one source.

Chinese real estate company Agile, meanwhile, is reportedly continuing to market its $400 million deal announced last Friday.

¬ Haymarket Media Limited. All rights reserved.
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