Guangzhou R&F, a leading Chinese property developer, raised $550 million last week in the first ever dual-tranche US dollar and offshore-renminbi (CNH) bond deal. Although both tranches were oversubscribed, the bigger size of the CNH offering gave an indication of where the predominantly Asian investor base saw the best value. In contrast, the dollar notes offered limited potential upside.
The joint global coordinators for the transaction were Credit Suisse and Goldman Sachs, and Citi and Morgan Stanley also acted as joint bookrunners. The banks marketed the proposed transaction in Hong Kong last Monday and Tuesday with initial price guidance for both tranches that didn’t change by the time it launched late on Wednesday night, according to sources familiar with the deal.
The CNH-tranche attracted the most interest, garnering an order book of Rmb4 billion ($615 million). The Rmb2.612 billion issue, which was re-offered at par, pays a 7% semi-annual coupon and has a maturity date of April 29, 2014. The yield compared favourably with other recent issues trading in the secondary market.
Comparable high-yield property issues include those of Beijing Capital and Road King, which both have existing three-year CNH issues offered at yields of about 3.3% and 5.3% respectively. In the secondary market late on Thursday, the Guangzhou CNH bonds traded up to 100.875.
The longer-dated US dollar tranche was launched in a crowded market. There have already been eight new Chinese property issues denominated in dollars so far this year, which amounts to $3.7 billion and is more than half the volume for the whole of 2010, when the mainland property market was under less pressure from Chinese authorities to curb speculative price rises and restrain leverage.
The $150 million dollar tranche pays a 10.875% coupon and was also re-offered at par with a maturity date of April 29, 2016. There was barely a yield premium over issues by similar or better credits, such as Shimao and Agile Property, hence the relatively muted investor response. Guangzhou R&F has a total debt-to-capital ratio of about 60%, which is higher thanCountry Garden (50%), Agile (54%), Shimao (57%) andLongfor (58%), according to analysts on Nomura’s sales-and-trading desk.
However, the notes traded stronger on Thursday and closed at 100.50.
Almost all of the Regulation-S deal, including the dollar tranche, was placed in Asia. Fund managers were allocated 56% of the CNH-tranche, private banks bought 23%, commercial banks 19% and others took 2%. The US-dollar tranche had a similar distribution profile: 49% was sold to fund managers, 27% to commercial banks, 23% to private banks and 1% to others.
The structure of the bond was slightly unusual. The borrowing entity was Big Will Investments, an unrated special purpose vehicle, guaranteed by R&F Properties (HK) — the ultimate borrower — a wholly owned subsidiary of Guangzhou R&F Properties, a PRC-incorporated company listed on the Hong Kong Stock Exchange. Guangzhou R&F gained approval from the regional State Administration of Foreign Exchange bureau to provide a guarantee up to $800 million.
The proceeds will be lent on to R&F Properties (HK) as an intercompany loan, which is guaranteed by Guangzhou R&F. The cash will be used mainly to repay about $200 million of existing debt, for offshore projects and other general corporate purposes.
However, Guangzhou R&F doesn’t guarantee the bond issue — R&F Properties (HK) does. So, as Annissa Lee, credit analyst on Nomura’s sales-and-trading desk pointed out, there is no certainty that Big Will Investments will redeem the bonds even if R&F Properties repays that loan.
As result, she said that the bond structure is “not significantly better than that of other property issues”, despite the comfort investors might feel from having an onshore guarantor in the structure with access to more cash sources as an alternative to the dividend payouts that offshore entities are normally forced to rely on.
On the other hand, there is an interest reserve account for each of the tranches, with a minimum balance of six months of interest payments.
Guangzhou R&F is a large-scale property developer with a landbank of 31.9 million square metres at an average cost of Rmb1,600 per square metre and a total of 101 project developments as of March 2011, according to Nomura. The company focuses on mid- to high-end property development, with revenues of Rmb24.6 billion, gross profit margin of 38% and presales of about Rmb32 billion in 2010, and it has a major presence in Guangzhou (17.5%), Tianjin (12.3%), Beijing (5.8%) and also in Shanghai, Huizhou, Hainan, Nanjing, Xian, Chongqing, Taiyuan and Shenyang.
It expects to generate about 60% of presales from Guangzhou, Beijing and Tianjin, which are all under purchase restrictions, said Nomura’s Lee.
The company was listed on the HKSE in July 2005.