Country Garden, one of the largest real estate developers in China, yesterday launched a tender offer to buy back its outstanding convertible bond which will become puttable in February next year. To pay for the buy-back, the company will issue new high-yield bonds with a seven-year maturity. A four-day roadshow to market the new issue will kick off in Hong Kong tomorrow.
Country Garden didn't say how much of the CB it wants to buy back or how large the new bond issue will be, but sources noted that the timetables for the two transactions have been set so that the size of the bond issue can be adjusted to correspond with the amount of CBs tendered.
"They'll size the bond according to the success of the tender," one source said, adding that the environment for new issuance is favourable at the moment. There hasn't been any high-yield issuance for a while and Country Garden's outstanding conventional bonds have also performed well, meaning the company should be able to sell enough bonds to cover the tender in full.
"We continue to see a lot of new money coming into the Asian credit markets in general, particularly for higher-yielding bonds such as these where they see a lot of value relative to high-yield globally and that is supporting flows quite considerably," the source said.
The CB, which is US-dollar settled, has a face value of Rmb4.314 billion ($630 million).
The replacement of the CB with a new high-yield bond issue will leave the company with significantly higher annual interest costs, but Country Garden said in an announcement to the Singapore Exchange (where the CB is trading) that the exercise will extend its average debt maturity and help it to maintain a strong liquidity position. On top of that, it will also "further enhance the company's international capital market profile and improve its ability to access the international capital markets to support [its future growth]".
Indeed, the exercise makes a lot of sense as the CB has served its purpose of providing low-cost financing while Country Garden was actively expanding its landbank, and the company would also likely have had to raise some money to redeem the bonds when the put option kicked in next year.
Investors can tender the CBs at a fixed price of 111% of face value plus accrued interest, which is at a slight discount to the put price of 111.997. This means the company will be able to make a small saving on the redemption of the bond, if investors agree to tender. And it seems likely that most will take the opportunity to cash in early since it makes little sense to hold out for one year just for one extra point. The likelihood that that CB will convert into equity before that is also slim, given that the conversion price is HK$9.05 and the share price is currently at HK$2.91 after gaining 2.8% yesterday.
As a further incentive to make the CB holders accept the offer, the tender price equals a substantial premium to the 107.75% where the bonds were bid yesterday morning before the announcement of the tender. Investors have until 11pm (Hong Kong time) on Tuesday, April 13 to tender their CBs.
The high-yield bonds may be launched the following Thursday after the roadshow ends in New York on Wednesday. The CB tender is conditional upon the completion of the bond issue and, if for some reason the bond issue doesn't yield enough to cover the full amount tendered, then the bonds will be bought back on a pro-rata basis.
Both transactions are arranged by Goldman Sachs and J.P. Morgan.
In addition to the CB, Country Garden also has a $300 million conventional high-yield bond outstanding, which was issued in September last year and expires in 2014. That bond, which marked the property developer's debut high-yield issue, pays a coupon of 11.75% and is currently trading at a yield of about 10% and a price of 105.5. According to a debt capital markets banker, the price fell by about 75bp when the new issue was announced, but then recovered about 25bp of that. Some of the drop would be due to people making room for the new issue, the banker said.
The company provided few details about the new bond issue, beyond the fact that it will have a seven-year maturity, but a source added that it will most likely be non-callable for the first four years. The new issue will be benchmarked against the outstanding 2014 bonds.
Moody's issued a preliminary rating of Baa3 to the Reg-S/144A bonds, which is one notch lower than Country Garden's Ba2 rating. The difference reflects the risk of legal and structural subordination, as subsidiary and secured debt will still comprise more than 20% of the company's total assets, the ratings agency said. The negative outlook also reflects the need for the company to overcome the execution risk on its lower profit margin projects outside Guangdong province and its somewhat weak credit metrics for the rating level.
Both ratings have a negative outlook.
"The rating is tempered by Country Garden's need for debt funding to support its rapid growth model, which will keep its leverage at the high end for its rating level. It is also constrained by the company's execution risk on projects outside Guangdong...and its reliance on cash flow from Guangdong Province," Moody's said in the ratings notice.