Hydoo, high yield, high price

Chinese trade centre developer executes a debut international bond but has to offer investors a 14% yield to clear the market.

Chinese trade centre developer Hydoo International Holdings successfully executed its debut international bond offering on Tuesday but only after offering investors an eye-watering 14% yield to clear the market.

The double-digit return set a new line in the sand for the higher yielding end of the Chinese property sector. For while there are other outstanding transactions with similarly high coupon levels, they were all originally sold with five non-call three structures, which typically command slightly higher yields to compensate for the call option.

By contrast, Hydoo's $100 million B3/B-/B rated deal had a three-year bullet structure. The Reg S transaction was priced mid-morning on Tuesday at an issue price of 99.404% and coupon of 13.75% to yield 14%.

Nearly all the investors who participated in the deal had already spent some weeks doing their credit work following a site visit. This meant sole global co-ordinator Morgan Stanley was able to build up $100 million of demand in the form of indications of interest (IOI) and anchor orders ahead of the deal's launch on Monday morning. 

This backstop demand gave the bank the confidence to approach the wider market and by the end of the one-and-a-half day bookbuild on Tuesday it had garnered a further $50 million in orders. However, this was not enough to ensure stable secondary market trading based on the $150 million to $200 million Hydoo had originally wanted to raise, so the bank decided to scale the deal back and hold over pricing from Monday night to Tuesday morning.

Observers said the paper is likely to be fairly illiquid since most of it has been tucked away with anchor investors. Some 22 accounts participated in total, with all the paper syndicated to Asian investors, the majority of whom are based in Hong Kong.

The deal had two pricing benchmarks, both from the same industry sub sector.

The first is a B/B+ rated 8.25% January 2019 deal (with a 2017 call option) for South China City Holdings. This was trading on a yield-to-worst of 10.14% on Tuesday.  

However, most investors focused on a second benchmark from Wuzhou International Holdings.

The group has a B3/B- rated 13.75% June 2018 bond (with a 2016 call option) outstanding. This was trading on Tuesday in the high 14% area.

Its secondary market trading levels have been under some pressure over the past month after the Hong Kong-listed stock was suspended on November 9 for two weeks pending the sale of a stake by its controlling shareholders. This has taken the brothers who run the company very close to the 50.1% level that would have triggered the change-of-control put option.

The divestment prompted Moody's to put the group on review for a potential downgrade, although Fitch has said it is unlikely to follow suit. It had already downgraded the group by one notch in September citing weak margins. 

"That deal unfortunately now has some hair on it. It had been trading around the 102/104 level but dropped to around 96/98 and some investors consequently tried to push back on Hydoo as well," one observer said.

Other property bonds with coupon levels similar to Hydoo include China Aoyuan, whose 13.875% November 2017 bond (callable 2016) was trading on a yield-to-worst of 9.089% on Tuesday, plus Modern Land, whose 13.875% November 2018 bond (callable in 2016) was trading on a yield-to-worst of 13.6%.

Hydoo and seek

Hydoo itself has not been without its fair share of controversy in recent years. In July 2014 it revealed that its chairman and founder, Wong Choihing, had gone missing for two weeks before announcing that he was "assisting the authorities". Shortly afterwards, his younger brother Wang Jianli replaced him as chairman.

Observers say Wong, who was once a long haul truck driver, attended the roadshow for the new bond deal and answered questions clearing up any residual concerns about a potential investigation. 

Other Hydoo shareholders include Hony Capital, which spent $80 million purchasing preference shares in July 2011 and has a 14.9% stake. The Wang family retain a controlling 59% stake, with public shareholders owning the remaining 26.1% following the group's listing on the Hong Kong Stock Exchange in October 2013.

The group this year also issued $120 million in convertible notes to Ping An Real Estate and signed a strategic co-operation agreement. Investors in the new bond deal rank pari passu to the convertible holders in terms of security over the company's capital stock.

According to the group's net roadshow, Hydoo currently has Rmb1.995 billion in bank loans and other borrowings, plus Rmb701 million from the CB. Some Rmb801 million is due in under one year, Rmb347 million in years one to three and Rmb1.548 billion through to five years. 

As of June 2015 total debt to assets stood at 20%, while total debt to Ebitda stood at 4.5 times, leading to an Ebitda to interest coverage ratio of 3.7 times. 

In its rating release, Fitch said Hydoo has a "healthy financial profile compared with other Fitch-rated non-residential property developers in China". However, it added that the ratings are "constrained by its small business scale, exposure to more-volatile commercial property demand and geographical concentration in lower-tier cities."

The group, which was established in 1995, pioneered the concept of trade centre development in China. Wholesaling is the primary form of business and it specialises in hardware, furniture and building materials developments in third- and fourth-tier cities.

It currently ranks second behind China South City in terms of its overall landbank with 10.4 million square metres compared to China South City's 28.8 million square metres.

At the end of Asian trading on Tuesday, the bonds were being quoted on a bid/offer spread of 99.1/99.4, marginally below their issue price

SC Lowy was also a joint bookrunner and joint lead manager on the deal, alongside Morgan Stanley.

This article has been amended to correctly spell SC Lowy's name, and reflect the fact it was a joint bookrunner and joint lead manager on the transaction.

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