Evergrande closes smooth bond amid restructure

China Evergrande is in the middle of a debt binge. But its latest deal looks likely to be used for refinancing.

China Evergrande Group, the country’s biggest property company, is in the midst of a bold restructuring.

The Hong Kong-listed company, already riding a debt-fuelled expansion, is now planning a move that many executives salivate about — a backdoor listing that will allow it to trade on China’s stock market, where valuations tend to be much higher than those in Hong Kong.

But a company the size of Evergrande faces many moving parts. After pulling off a consent solicitation on its outstanding bonds this month, the company faced another challenge last week. Evergrande needed to raise $1.5 billion, giving it the capital to pay back a pair of bonds that became callable last year, said a syndicate banker.

The fund-raising did not prove much of a hurdle. The company turned to Reg-S investors on Friday, selling a $500 million three-year bond and a $1 billion five-year note.

The property company chose to issue bonds amid a rush to invest by fund managers in Asia. That helped the deal get bumper demand and ensured that the bonds traded up in the secondary market on Monday.

It also removed one burden hanging over the heads of those Evergrande executives who are eager to see their shares trade on the mainland — as long as they come at mainland valuations.

Sales or profits?

The overwhelming demand for the deal may have been helped by China Evergrande’s growth performance in 2016. The company raised Rmb373.37 billion from property sales during the period, an increase of 85.4% over the same period last year.

But the swelling sales did not lead to higher profits. Although Evergrande managed to push its six-month revenues to Rmb87.4 billion, a jump of 12.5% over the same period in 2015, the company’s profits fell over 46%. That was due to rising sales costs, marketing costs, and administrative expenses, as well as dwindling returns on investment properties.

Still, the company appeared to have more than enough pull to attract investors who are increasingly hungry to add to their portfolios, after the Federal Reserve raised US interest rates last week by 25bp.

“Evergrande’s credit profile has improved in the past 12 months after the group surpassed its Rmb300 billion sales target and overtook Vanke as the largest property developer last year,” a Hong Kong-based investor told FinanceAsia. “The yields at new bonds look attractive to yield-hungry investors.”

The success of the bond will means China Everbright can turn its attention towards securing a backdoor listing on the Shanghai stock exchange. Backdoor listings allow companies to take control of entities that already have a stock market listing, giving the buyer a quicker — and a potentially much more lucrative — path to market.

Evergrande wants to inject most of the property assets managed by a subsidiary, Henda Real Estate, into Shenzhen Special Economic Zone Real Estate & Properties Group, a Shenzhen-listed company controlled that it also controls. The entire restructuring is expected to be completed by April, according to people familiar with the company's thinking.

In a bid to ready itself for the deal, Evergrande raised Rmb30 billion ($4.35 billion) in January by selling a 13.16% stake in a wholly-owned subsidiary Hengda Real Estate to eight investors. It has said it will use some of the money to pay back debt, although analysts at S&P Global said the move would have only a “moderately positive” impact on Evergrande’s leverage. Evergrande has also agreed to buy back the shares if the backdoor listing does not happen by January 30, 2020, said S&P.

Evergrande is also in talks with strategic investors for a fresh round of fundraising, which could fetch another Rmb15 billion ($2.17 billion) for a minority stake in Henda Real Estate, the sources told FinanceAsia, speaking on condition of anonymity because the negotiation is still going on.

“The equity fundraisings helped pave the way for Evergrande to list in Shenzhen through a backdoor listing,” one of the sources said. “We aim to complete the listing by this year subject to regulatory approvals in China and Hong Kong.”

Chinese regulators have clamped down on backdoor listings since last year. But the idea remains popular, and Evergrande is not the only large corporation hoping to take the route to the mainland equity market. Dalian Wanda, a commercial property developer, is seeking a Shanghai listing barely two years since its Hong Kong IPO.

Pay back

By the time Evergrande had closed the order books for its latest bond, the company had generated more than $3.1 billion of orders from 153 accounts for its three-year note, while demand for the five-year tranche reached $2.3 billion from 140 accounts, according to a syndicate banker working on the deal.

"The peak order book was more than $6 billion, building a strong momemtum before the release of final price guidance," a syndicate banker running the deal said.

On Friday morning, Evergrande — rated B2/B-/B+ by Moody’s, S&P Global and Fitch — went out with initial price guidance for the three-year note at “the 7.5% area” and the five non-call three-year note at “the 8.5% area”. Both tranches came inside those indications. The bonds ended up being fixed at par, with a 7% coupon for the three-year and a 8.25% return on the five-year, according to a term sheet seen by FinanceAsia.

The group’s outstanding $1.5 billion 8.75% October 2018 bonds have been callable since last October, making the redemption of that deal the likely use of a proceeds, said a banker familiar with the deal.

In secondary trading, the two new bonds were trading up on Monday morning. The March 2020 bond was quoted at 100.5/101, while the March 2022 bond was trading at 100/100.25, according to market data.

The majority of the two bonds were sold to Asian investors, leaving 6% to Europe, Middle East and Africa investors for the three-year note and 5% for the five-year note.

Fund managers took 46% of the shorter-dated note, banks 41% and private banks 13%. In contrast, private banks were major buyers of the five-year tranche, taking 38%. Banks bought 36% and fund managers got the remaining 26%.

Evergrande wants to achieve Rmb450 billion in contracted sales this year, according to sources citing Xu in an internal speech. The Guangzhou-based group wants to build a conglomerate with Rmb3 trillion of total assets by 2020, he said. That would include property, finance, healthcare services, as well as cultural and tourism.

Evergande had around Rmb381.3 billion of debt on June 30, 2016, almost 45.3% of which was set to fall due during the following 12 months.

The bookrunners of the bond were Credit Suisse, China Merchant Securities Hong Kong and Haitong International.

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