Hang Lung reignites unrated space

Hong Kong-listed Chinese developer raises a $500 million seven-year note, reviving the region’s unrated space amid improving market confidence.

Hang Lung Properties, a real estate group with operations in Hong Kong and mainland China, issued a $500 million seven-year bond on Wednesday, revitalising Asia’s unrated space as confidence returns to the region.

The Reg-S bond, a drawdown off the developer’s $3 billion medium-term note programme, attracted an order book of $1.9 billion from more than 110 accounts, indicating strong investor interest for unrated names.

The Asian debt capital market has been fairing relatively well over the past few days and were buoyed by the minutes released from the Federal Open Market Committee’s March meeting on Wednesday, where members discussed keeping interest rates low as long as inflation remained less than 2% and didn’t elaborate on an accelerated time frame for raising the rates.

The US Commerce Department’s personal consumption expenditures price index, which is the Fed’s favored measure of inflation, was up 0.9% in February from a year earlier. The Labor Department’s consumer-price index, an alternative measure, was up 1.1%.

As a result, Asia high-yield bonds outperformed last week when cash spreads tightened by 23bp, whereas Asia investment-grade cash spreads tightened by 9bp, according to Morgan Stanley.

Such conditions proved to be conducive for unrated bond issuances, highlight experts. “In the dollar space, it’s more backdrop-dependent and you would tend to see more unrated names when sentiment is bullish, and it is right now,” said a Hong Kong-based high-grade syndicate banker to FinanceAsia.

Chalco is currently in the market with an unrated benchmark dollar perpetual bond that is callable in the third year, according to sources familiar with the matter. 

Extra due diligence

Although the unrated sector tends to be open for repeat issuers that have good brand recognition, prudent managerial style and stable performance track record, it’s a space where investors need to do extra due diligence, bankers said.

“Rating agencies play that de facto regulator role – monitoring the company and advising investors when things are going poorly or well,” said the syndicate banker. “In the absence of that, investors need to monitor the business more proactively themselves. [Issuing unrated bonds] only works for names where investors have a certain degree of trust in management.”

According to Dealogic data, there have only been four unrated offerings with volumes of $1.7 billion in the G3 Asia ex-Japan space year-to-date, five times less than last year’s $8.7 billion with 25 deals during the same period.

New World Development – a Hong Kong-based company active in property, infrastructure, services and telecoms – was the last issuer to raise an unrated bond. In February, the firm sold a $750 million seven-year note at a coupon of 5.25%.

Pricing

Hang Lung’s note priced 15bp tighter than its initial price guidance of Treasuries plus 250bp area. The nearest comparable for the bond was the developer’s existing paper expiring in 2022, which was trading a G-spread of 238bp prior to announcement on Wednesday, according to a source close to the deal.

Asian investors subscribed to 95% of Hang Lung’s notes, while the rest went to European investors. More than half of the paper went to fund managers, whereas financial institutions took up 21%, private banks 11%, insurance 11% and corporates 2%, according to a term sheet seen by FinanceAsia.

The bond has a coupon of 4.45%. HSBC and JPMorgan are joint bookrunners of the transaction.

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