Country Garden pays up for largest high-yield corporate bond from China

Country Garden prices a $900 million seven-year non-call four bond at a generous 11.25% yield amid bearish reports on the property sector.

Country Garden, one of China's largest property developers, early yesterday morning priced a $900 million seven-year non-call four bond. The deal, which is the largest US dollar-denominated high-yield bond by a non-government-linked Chinese corporation, launched amid intensifying concerns over the increasing mountain of debt issued by China's real estate firms.

To raise $900 million, Country Garden had to dangle a juicy yield to investors. The bonds priced at a yield of 11.25% -- right on the final guidance -- and at an 821.4bp spread over Treasuries. The coupon was fixed at 11.125%.

Goldman Sachs and J.P. Morgan were joint global co-ordinators as well as joint bookrunners together with Deutsche Bank.

The new bonds, which mature on February 23, 2018, offered a 75bp new issue premium for a 10-month extension over Country Garden's outstanding bonds that mature on April 22, 2017.

“The pricing on Country Garden is generous. The new bonds offered a 75bp new issue premium versus the usual 40bp-50bp premium, so there is something left on the table for investors,” said Scott Bennett, head of Asian credit at Aberdeen Asset Management.

The bonds found a firm bid in the secondary market, with private banking accounts said to be buying. The bonds traded at 99.875/99.95 yesterday morning, about half a point above the 99.405 reoffer price. They continued to hover around par, indicating that, for the size, the pricing was right.

The Reg-S/144a deal drew an order book of $3.7 billion from more than 225 accounts, which included some anchor orders. Asia took up 51%, Europe 21% and the US a sizeable 28%. Funds bought 57%, retail 36%, banks 5% and corporations/others 2%.

The final pricing was about 25bp inside the initial price whisper in the area of 11.5% that was released on Tuesday. The whisper, which investors deemed cheap, led to a prompt softening in Country Garden’s outstanding April 2017s. The yield on that bond rose by about 50bp to 10.45% on Tuesday from a yield in the high 9% range the previous week.

The generous initial price whisper also sparked a re-pricing in other benchmark China property names, which fell about one point on average on Tuesday. The Agile Property 2017s, Shimao Property 2017s and Yanlord Land 2017s all softened.

However, the Country Garden deal gathered strong momentum and the leads subsequently tightened the price guidance from around 11.375% to 11.25%, which was the final guidance. The size was also increased from the $750 million the leads had guided investors towards previously. There were rumours that the company was seeking to raise $1billion though.

“Country Garden is paying up, even though it priced at 11.25% at the tight end of guidance. But, at this stage, I think the company is concerned about getting liquidity, rather than saving a few basis points,” said one banker away from the deal.

The Chinese government has been desperately trying to curb inflation and cool down the property sector. Despite this, Chinese developers are aggressively expanding and piling on more debt. Since January 2011, property developers have raised $3 billion from the offshore bond markets.

While Country Garden was on the road, ratings agency Standard & Poor’s released a report cautioning that debt issuance is likely to weaken the credit ratios of many Chinese real estate developers (including Country Garden), leaving them vulnerable to sudden property price declines.

"If developers continue to launch bond issues with such frequency, they could face significant refinancing risks, as maturity profiles become more concentrated in a span of a few months. If market conditions are not supportive nearer the bonds' maturity dates, some issuers can expect financial difficulties," Standard & Poor’s credit analyst Bei Fu said in her February 15 report.

Country Garden tapped the US dollar market twice last year, with a $550 million seven-year bond issued in April and a $400 million five-year bond in August. It has outstanding bonds which mature in 2014, 2015, 2017 and 2018.

Country Garden chose to tap the dollar market as it wanted to issue bonds with a longer maturity. The synthetic offshore renminbi bond market, which would have been an alternative, typically is a market for bonds with three- and five-year maturities.

Also, since Evergrande Real Estate priced its gigantic Rmb9.25 billion ($1.4 billion) US dollar-settled offshore renminbi bond, that market has been shut, with no sizeable bonds pricing.

Country Garden closed its deal following a series of extensive roadshows in Hong Kong, Singapore, London, New York and Boston, which ended on February 15.

Country Garden’s issue is rated Ba3/BB- by Moody's/Standard & Poor's. The proceeds will be used to fund existing and new property projects and for general corporate purposes.

Meanwhile, Road King Infrastructure said yesterday that it is planning an international offering of renminbi bonds. DBS and J.P. Morgan are joint bookrunners for the bonds, which will be settled in renminbi. Banco Bilbao Vizcaya Argentaria and Citic Bank International are senior co-lead managers.

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