For an outsider looking in, Evergrande's bond deal was going to be a tough sell. China has recently tightened regulations for the property sector and, in the US, the regulatory environment is closing in on banks.
Indeed, critics were a bit circumspect about the timing of the deal, but Evergrande Real Estate went ahead and priced a $750 million high-yield Reg-S bond in the early hours of Friday morning Hong Kong time, on the back of a very tough trading day in the US. The five-year notes pay a coupon of 13% and were re-offered at par, which means the yield to maturity (January 27, 2015) is also 13%. At the time of pricing, this was equivalent to a spread of 1,065.8bp over the US Treasury yield.
This was the second high-yield transaction from China in as many months, after Agile Property Holdings issued a $300 million bond in November 2009, and the deal was said to be the largest high-yield offer to date from the Chinese property sector.
Investors from Asia were allocated 65%, the US took 20% and Europe 15%. In terms of type of investor, fund and asset managers walked away with 42% of the bonds, insurance and pension funds received 26%, private banks took 27% and banks bought 5%.
The deal, which was jointly led by Bank of America Merrill Lynch, Bank of China International and Goldman Sachs, was 3.3 times subscribed with a final book size of $2.5 billion split on 175 orders. In the lead up to pricing, many analysts compared this deal to Country Garden's $300 million issue in September 2009, which was praised for its strong performance in the secondary market. In the end Evergrande priced at yield that was at least 150bp above Country Garden.
Some commentators had criticised the timing of the deal, particularly in light of what one source called, "a peculiar day for trading". Stocks across the board plummeted in reaction to President Obama's proposed new limits on big US banks so it came as no surprise that the performance of the bond in the secondary market wasn't that good. However, as one source close to the deal put it, "given the backdrop against which the bonds were issued, they fared well in comparison".
Brayan Lai, a credit analyst at Calyon, noted that "13% was around the tightest (yield) where relative value could be attained for this deal". He viewed the notes as, "the weakest credit in the double-B Chinese property space" and suspected that the buyers of the credit may not have been that strong. Consequently they may sell the bonds again if the overall market weakens.
However, sources close to the deal said there was strong investor interest leading up to the pricing and, in the end, they were very satisfied with the quality of the investors who bought into the deal.
Annisa Lee, credit analyst for Nomura, saw no issues with the timing of the deal as Asian high-yield bonds have tighten substantially over the past two weeks. However, she argued that the order book was quite weak relative to the issue size of $750 million.
"This does not help secondary trading of the bonds." she said. "The sell-off in the US overnight added more selling pressure on the bonds early Friday morning and we expect the [Evergrande] bond to trade wider than that of Country Garden by at least 150bp. Such spread differential may narrow if Evergrande can show its ability to complete its GFA [gross floor area] as planned and achieve its pre-sale target over the next 12 months."
The bonds traded weaker in the aftermarket, and late on Friday were quoted at a yield of 13.175%. Despite this, Lee presented an optimistic outlook for the bonds' performance. "Normally, overseas clients would be the first to sell Asian bonds given they're less familiar [with them] and not in close proximity with the issuers. The relatively low participation from US and European accounts may help the performance of the bonds, should the sell-off continue."
Moody's rated the issue B1, Standard and Poor's rated it BB- and Fitch BB+. The stable ratings were based on Evergrande's market dominance and positive long-term property market fundamentals. Fitch stated in its ratings notice that "Evergrande's liquidity buffer was materially strengthened by the strong pre-sales during 2009 and its IPO in October 2009".
Photo by Imaginechina.