Greenland debuts Asia’s largest Reg-S high-yield bond

The builder of one of China’s tallest buildings has sold a $700 million bond – the largest for a first-time borrower in the sub-investment grade space – underscoring strong appetite for deal structures with extra investor protection.
Greenland is one of the top three homebuilders in China.
Greenland is one of the top three homebuilders in China.

Greenland Hong Kong Holdings has sold Asia’s largest ever Reg-S sub-investment grade bond for a debut issuer, joining the extensive list of Chinese developers that have raised cash in global capital markets since September.

The $700 million three-year note with a coupon of 4.75% comes at a rosy time for mainland developers, buoyed by China’s recovering housing market and strong investor demand for credits with keepwell deeds.

“Greenland is [Asia's] first non-public company to successfully issue under a keepwell deed, which is a strong testimony of Chinese issuers’ access to capital markets with this structure,” said a source close to the deal. “It is also the largest ever [Reg-S] sub-investment grade bond to debut in Asia.”

Regulation S – or Reg S for short – is an exclusion from the Section 5 registration requirements of the Securities Act of 1933 for offerings made outside the United States by both US and foreign issuers. A bond offering made by an issuer outside the United States in reliance on Reg S, for example, need not be registered under the Securities Act.

A keepwell agreement is a contract between a parent company and its subsidiary to maintain solvency and financial backing throughout the term set in the agreement.

Greenland’s keepwell is also supplemented by a “deed of equity interest purchase” undertaking, in which any gaps in bond repayments could theoretically be met by the onshore parent company  agreeing to buy a stake in subsidiaries held by the offshore issuer – at a price higher enough to honour any debt commitment regardless of the underlying value of stake. The equity proceeds could then be used by the offshore issuer to pay back bondholders.

Based on these credit-enhancements, Greenland’s Ba1/BB+/BBB- rated deal was upsized from an initial size of $500 million due to the strong investor demand for such structures, and priced at 4.875% - much tighter than its initial price guidance of 5% area, according to a source.

Additionally, the note came in at much more competitive terms versus its nearest comparable bond, which was Franshion Properties’ $300 million five-year bond that priced at 5.375% on Wednesday. After adjusting for the curve, Greenland’s bond would be around the high-4% level – not including new issue premium for a debut issuer as well as compensation for the larger issuance size.

“The real achievement is in the size,” added the source. “They probably priced in line to slightly better to what Franshion could have done with a larger size.”

Greenland’s bond received a whopping order book of $3 billion from 160 accounts. Asian investors subscribed to a bulk of the notes, accounting for 89%, while the remainder went to European investors. Private banks took slightly more than half of the papers, while 39% went to fund managers, 8% to banks and 1% others.

The notes outperformed slightly when Asian markets opened, with prices rising from its reoffer price of 99.655 to 99.75 in secondary markets today, highlights the source.

Moody's expects Greenland Hong Kong to use the proceeds to fund potential asset acquisitions, refinance existing indebtedness of the company, and invest in projects in China and for general corporate purposes.

Greenland’s notes takes the number of G3 bonds issued by Chinese property companies this month to three, with total volumes of $1.15 billion, inching its way up to September’s volume of $1.7 billion with five deals done after the summer lull, according to Dealogic data.

HSBC and JPMorgan were joint global coordinators of Greenland’s bond. Bank of China International, Citi, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan and Morgan Stanley were the joint bookrunners of the deal.

Greenland is one of the top three homebuilders in China, and is constructing a tower complex in Wuhan, which will be one of the tallest buildings in the country when completed.

It achieved contracted sales of Rmb85 billion year to date through end August and Rmb105 billion ($13.9 billion) in 2012. Its size provides significant cost benefits, while its diversification mitigates risks from individual market volatility.

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