Country Garden plans $410m rights issue

Property developer run by China's richest woman Yang Huiyan opts for rights issue rather than block to avoid diluting her stake.
Yang Huiyan
Yang Huiyan

Country Garden, China’s seventh largest property developer controlled by the country’s wealthiest woman Yang Huiyan, aims to raise up to HK$3.2 billion ($410 million) in a rights issue to help pay down its debt.

Some 1.3 billion shares will be sold at a ratio of one share for every 15 shares held at HK$2.50, a 31% discount to the August 27 closing price, according to a termsheet seen by FinanceAsia.

The offer period will last from September 23 to October 8, with a listing date scheduled for October 16, the term sheet said. Goldman Sachs and JP Morgan are leading the transaction, which will result in $410 million of fresh capital for Country Garden.

Some market participants questioned why Country Garden did not hold an accelerated block instead of a rights issue, given the small size.

Yang, who owns 59.49% of the company and is the majority shareholder, would not have been allowed to participate in the block, which could have led to share dilution, according to a banker close to the deal.

“The only way to raise money without diluting her shares is by holding a rights issue,” the banker told FinanceAsia.

The proceeds from the deal will go towards paying down Country Garden Holdings’ aggregated debt, which stood at Rmb56.2 billion ($9.1 billion) as of year-end 2013. Bank loans total Rmb33.2 billion and senior notes are about Rmb23.1 billion, according to the company’s 2013 annual report.

The rights issue will pay down notes that mature next month. Goldman Sachs and JP Morgan will loan $400 million to the company to cover a $375 million bond that matures on October 16. Country Garden will repay the bridge loan once it receives the proceeds, the banker said.

Bond issuance
Country Garden, like many of its peers, has increasingly tapped fixed-income markets to issue bonds in order to fund land purchases amid soaring real estate prices in 2013. Country Garden raised a $750 million seven-and-a-half year high-yield bond last September.

It followed a flurry of activity by other mainland developers, including CIFI Holdings, which issued a $234 million four-and-a-half year bond at a yield of 12.25%, and Greentown China, which sold a $300 million five-and-a-half year note at a yield of 8%. Both deals were completed last September.  

Although bond issuance remains a relatively cheap source of financing, yields are rising, so property developers are now turning to equity capital markets to reduce leverage.

“[Everyone] was issuing bonds like crazy. Now [they] need to de-lever their balance sheets,” the banker said, noting that Country Garden’s leverage stands at around 300%. “It’s very highly levered.”

China property market
Still, China’s red-hot property market is cooling. Home prices in China fell 0.1% in July from June, the fourth consecutive monthly drop, according to real estate services firm E-House China. However, they are still up 4.3% in July compared to the same month in 2013.

Shares in Country Garden fell 5% following the rights issue announcement and are down 23% so far this year up to August 28, underpinning liquidity concerns for Chinese developers amid the slowing housing market.

Housing transactions have dropped from their 2013 peaks. Banks are partly to blame for taking longer to approve and disburse mortgage loans following a spate of defaults.

The government this spring began taking action to forestall a painful crash by urging banks to offer more mortgage financing to first time homebuyers. It also began allowing equity issuance to developers.

Discount
The 31% discount for Country Garden’s rights issue may seem high but it is actually in line with most rights issues in Hong Kong, which typically have discounts ranging from 28% to 45%, note sources close to the deal.

PICC Property & Casualty, the non-life insurance arm of Chinese insurance arm PICC Group, raised $290 million of fresh capital in a rights issue last June, with investors buying shares at a 38.5% discount. When the deal was first announced, the discount to the last market price was 47.3%.

Shui On Land, the flagship property development company of Chinese firm Shui On Group, raised HK$4.1 billion in a rights issue in March 2013, with the shares offered at a 45% discount.

More recently, Hong Kong’s New World Development held a rights issue with a 30% discount, with the company using the proceeds to help take its New World China Land unit private for $2.4 billion.

One exception is HKT Trust, the telecom trust controlled by Hong Kong tycoon Richard Li, which raised $1 billion in a rights issue in July by offering shares at a 21% discount.

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