Hong Long releases bond terms

Market observers say the Chinese property company did well with the pricing of its $90 million deal, but sources stress this is not a sign that the high-yield market is opening.
The Hong Kong Stock Exchange (HKSE) yesterday released the terms of the $90 million bond deal issued by Chinese property developer Hong Long via sole bookrunner Citi and joint lead manager Lehman Brothers.

Closing with a coupon of 12.5%, the five-year deal was issued with an equity kicker in the form of 81 million warrants on Thursday afternoon last week.

Initially flagged as a $200 million public bond, the issue was downsized and eventually sold into the private placement sector after the market took a turn for the worse in July.

By opting for the private route, Hong Long protected itself from unnecessary market exposure. For example, Hong Long could have publicly released the terms of the trade, and then been forced to withdraw following a sudden downturn.

Instead, the issuer targeted a specialised group of accounts, with hedge funds presumably the primary buyers of the bonds. Probably no more than 10 accounts participated in the transaction, according to one source.

The transaction follows two China property loans with warrants (essentially the same as bonds with warrants) that priced in the private market in the last month, namely a $300 million deal by Hengda managed by Credit Suisse, and a $400 million deal by Lodha Developers managed by Deutsche Bank. These both priced with an IRR of approximately 20%.

The IRR for Hong Long's bond (or combined yield of bonds and warrants) was difficult to confirm due to the private nature of the deal. Varying sources state figures between 15% and 18%, but FinanceAsia was unable to confirm this.

The discrepancies are allegedly based on the extent to which each investor values volatility and what models they use to calculate the yield.

However, it is known that the exercise price per warrant share is HK$3.36 subject to reset and adjustment in certain circumstances, and that the closing price of the shares on the last full day of trading prior to the announcement was HK$2.98. The exercise price is therefore a premium of approximately 12.75% of the closing price per share. Moreover, it is a premium of approximately 9.8% to the average closing price per share of HK$3.06 as quoted on the stock exchange for the five days prior to the last day of trading.

Syndicate bankers are generally positive about Hong LongÆs performance: ôThey had marketed the deal as a public transaction in July, put it on hold, and then re-engaged accounts again under a different format to already rattled investors, asking them to consider a sector that is not popular at the moment. So they have had a pretty tumultuous run but they pulled it off eventually,ö says one.

Another source states: ôIn my view, the entire China property market is either plateauing or dropping off. In order to price its bond, Hong Long followed the private route, issued an equity kicker, and downsized û a pretty considerable concession to the market compared to the initial deal that was expected. But they did what they had to do to get the deal done.ö

The private sector generally requires tighter covenant packages and stricter borrowing limitations, but it is not known whether Hong Long's covenant package was amended in order to price this transaction.

And for bonds in general, does this bode well for a revival of the high-yield market, as reported yesterday by FinanceAsia?

ôThis is a private deal, marketed to private investors. Transactions of this nature are getting done relatively frequently in this sector. $700 million-worth of private Chinese real estate deals have priced in the last month via just two transactions (Hengda and Lodha). Deals in the private market never stopped, despite the crisis. ItÆs the public deals that have dried up. Since this is a private placement transaction, it is therefore not a sign that the high-yield G3 public market is opening up,ö concludes one source categorically.

Hong Long will use the proceeds to help fund the groupÆs business growth in mainland China. Approximately $40 million will finance the acquisition and development of property projects in southern China, while another $20 million will help repay some debt including an outstanding loan from Lehmans, according to documentation posted on the HKSEÆs website. The remainder will go towards general corporate purposes.
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