Country Garden sold a $900 million five-year bond that is callable in year three late on Thursday, breaking the high-yield bond silence prompted by the Chinese New Year holidays.
The latest offering — which this time only targeted Reg S investors — priced at a yield of 7.5%, which is 37.5 basis points tighter than its initial price guidance area of 7.875%, according to a term sheet seen by FinanceAsia.
The funds raised will be used by Country Garden to refinance its $900 million 11.125% notes, which are due in 2018 but callable next month, as well as other existing debt, a source familiar with the matter told FinanceAsia.
The notes will strengthen Country Garden's capital structure because they will lengthen the average tenure of its debt portfolio and reduce its weighted average cost of borrowing, said Moody's in a February 26 report.
Country Garden's weighted average borrowing cost decreased to 8.23% in the six months ending June 2014 from 9.24% for the same period in 2013, added the rating agency.
Country Garden’s latest offering benefits from more stable market conditions since the passing of the Chinese New Year.
“The [Chinese] economic environment is growing at a sustainable rate, which bodes well for the property sector,” Charles Macgregor, head of Asia high-yield research at independent credit research firm Lucror Analytics, told FinanceAsia. “Initiatives taken by the [Chinese] central bank last week also increased confidence.”
The latest HSBC China Manufacturing Purchasing Managers’ Index, a widely tracked indicator of manufacturing activity in China, showed a mild rebound in February to 50.1, which is a four-month high and a whisker above the 50-point level that separates growth from contraction. January’s final PMI was 49.7.
The People’s Bank of China also made it clear on February 9 that it is prepared to fight any downturn in the world’s second-largest economy, which could include propping up the waning real estate sector. According to some analysts, the central bank is working on a few steps to counter a housing market slump.
On Wednesday, the Asian high-yield bond market enjoyed a strong day on the back of a robust performance from the Chinese property sector. Bonds issued by Agile Property, KWG Property and Guangzhou R&F Properties rose by 1 to 2 basis points in prices, Lucror Analytics said in a note on Thursday.
The supply of new, property-related bonds stagnated in January after Shenzhen-based developer Kaisa Group almost defaulted on its debt. Only one bond was sold in January, a $1.2 billion Sino-Ocean Land issue, compared with the $5.55 billion raised by Chinese developers in January 2014.
In February, Shimao Property and Evergrande both chose to opportunistically raise dollar bonds totalling $800 million and $1 billion, respectively, as the Kaisa concerns dwindled upon the expectation that Sunac was going to buy a stake in the troubled developer.
House prices in January fell in 69 cities from a year earlier, compared with 68 in December. They dropped 3.2% in Beijing, compared to a 15% gain in January 2014, while sliding 4.2% in Shanghai, according to official data.
Comparables
The closest comparables for Country Garden’s bond includes its existing notes expiring in May 2019 and April 2021, which have a yield-to-worst (YTW) — the lowest yield an investor can expect when investing in a callable bond — of 7.05% and 7.65%, respectively, according to a source close to the deal.
Other comparables include Shimao Property and Longfor Properties, which have outstanding bonds maturing in January 2020 and October 2019 that traded at a YTW of 7% and 6.25%.
Fair value of the deal would be around 7.3%, suggesting a healthy new issue premium concession of 57bp based on initial price guidance, said Mark Reade, fixed income analyst at Mizuho Securities.
“[This] looks attractive for a credit which remains one of our top picks in the Chinese high-yield property space given its solid track record both operationally & financially,” Reade said.
Total orderbooks for the transaction reached over $4.5 billion from more than 280 accounts. Asia investors subscribed to 83% of the notes, while the rest went to European investors.
Fund managers purchased 57% of the notes, followed by banks with 24%, private banks 13% and others 6%, according to a source familiar with the matter.
Country Garden is among China’s largest property developers, with a focus on middle-class residential properties in suburban areas of first-tier cities and in newly urbanised town centres of lower-tier cities.
The developer was incorporated in 1997 and in 2007 the company listed on the Hong Kong Stock Exchange, where its current market capitalisation is HK$63 billion ($8.1 billion).
CLSA, Deutsche Bank, Goldman Sachs, HSBC and JP Morgan were the joint bookrunners of the Ba2/BB+/BB+ rated offering.
