Country Garden reopens high-yield market with $300 million issue

Chinese property developer Country Garden issues Asia's first true high-yield bond in 14 months with an 11.75% five-year deal arranged by J.P. Morgan.

Country Garden laid the strongest claim yet to being the first Asian borrower to re-open Asia's high-yield bond market when it priced a five-year deal arranged by J.P. Morgan yesterday.

It is the first stand-alone Asian high-yield corporate deal since Indian mining group Vedanta Resources raised $1.25 billion in June 2008. Last month, sub-investment grade Indonesian retailer Matahari Putra Prima completed a successful bond exchange, which included a substantial issue of new notes, and Indonesian state-owned power company PLN raised $750 million with a 10-year deal.

But, Country Garden's issue is the clearest sign so far that the high-yield market is open for Asian borrowers with a compelling story and, perhaps, a fan base.  Simply, it is a high-yield issue with no caveats or qualifications attached.

The rule 144A, regulation S issue pays a coupon of 11.75%, which was at the tight end of the 11.75%-12% range indicated during early investor soundings, and was re-offered at par. The final maturity date is September 10, 2014.

Although there is no early call provision, Country Garden has the option to redeem the notes with the consent of holders at any time throughout the life of the bond by paying a premium. The bonds rank pari passu with the company's other existing senior unsecured obligations, including its $600 million 2.5% convertible bond, which may become due in February 2011 if investors exercise their put options.

Brayan Lai, credit analyst at Calyon, reckoned the deal was cheap compared to seasoned high-yield issues such as the Agile 2013 and Shimao 2016, both issued by Chinese property companies and both offered at a yield of around 10.80% at the beginning of the week; while another comparable, Road King, with property interests as well as a toll road business, was trading at a yield of 11.40%.

After pricing last night, the Country Garden bonds immediately traded up half-a-percentage point to 100.5, yielding about 11.5%.

The primary market process took just two days, and by the end of it the order book amounted to $800 million and bonds were allocated to 70 separate accounts. Asian investors, up to two-thirds of which were based in Hong Kong, bought 65% of the deal, while the remaining 35% was distributed evenly between the US and Europe, according to a source familiar with transaction. Asset managers, including long-only funds and hedge funds, took 55%, retail bought 25% and the balance was sold to insurance companies and other institutional investors.

Moody's Investors Service assigned a Ba3 rating with a negative outlook to the senior unsecured bonds, while reaffirming Country Garden's corporate family rating at Ba2, also with a negative outlook. "The bond rating has been lowered by one notch to reflect the risks of legal and structural subordination, as subsidiary and secured debts are expected to remain above 20% of the company's total assets", said Moody's in a note released on Tuesday.

Standard & Poor's said that it is likely to lower its rating on the issue to BB- (equivalent to the Moody's rating) from BB, and also threatened to lower the rating on the issuer a notch if the deal size exceeded $500 million, due to concerns about the company's "leveraged funding structure".  

Proceeds from the bonds will be used for the repayment of an outstanding $35 million debt owed to CITIC Ka Wah Bank Ltd, to fund property developments in mainland China and for general corporate purposes.

Set up in China in 1997 and listed in Hong Kong in April 2007, Country Garden Holdings is one of the leading property developers on the Chinese mainland.

The company has large suburban property development projects in the Guangdong Province and its "low land costs and pricing flexibility have resulted in stable sales performance through the down cycle," said Peter Choy, a Moody's vice president and senior credit officer.

Long-term property demand by China's growing middle class, especially for affordable housing with value-added services in integrated townships, also suits the company's business model.

Moody's downgraded Country Garden's corporate rating from Ba1 on April 22, 2009. The release of the company's half-year results for the period to June 30 had no impact on its ratings, the agency said at the end of last month.

Country Garden's contracted property sales grew by 30% year-on-year to 1.92 million square metres during the period, but its average selling price declined from Rmb8,012 ($1,173) per square metre to Rmb4,973. According to Moody's the decline in the selling price was anticipated as the company had fewer villas to sell and had experienced downward pressure on sales prices in its projects outside Guangdong Province. As a result, the gross profit margin and the Ebitda margin narrowed to 31.9% and 28.9% respectively.

"At the same time, Country Garden has addressed this pressure on its profit margins by focusing more on developments in Guangdong Province, where selling prices are more favourable," said Choy. It aims to generate at least 70% of its sales from Guangdong Province in the next two years. Also, the company's "liquidity position remains adequate for the next 12 months, and it has a target of maintaining an average unrestricted cash balance of Rmb3.0 billion," said Choy.

Yet, Moody's believe that Country Garden's key credit metrics for the next one to two years, including a debt-to-total capitalisation ratio of 45%-50%, debt-to-Ebitda of 3.5x -4.5x, and Ebitda-to-interest of 3.5x-4.0x, are still at the weaker end of the range for its current corporate family rating of Ba2.

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