Sunac China knew it would be hard work to sell $1 billion-worth of bonds given the recent scrutiny of its string of acquisitions, the fact it was on credit-watch negative and an eye-popping leverage ratio. So it took no chances.
The Tianjin-based home builder offered an attractive yield pick-up over its larger rival Evergrande and hired a wide array of bankers to market eke out investors looking for fixed income assets.
Sunac China's Reg S sale needed to overcome concerns following a slew of high-profile acquisitions in the past few months, including a Rmb43.8 billion ($6.51 billion) purchase of 13 cultural and tourism projects from Dalian Wanda, and a Rmb15 billion investment in LeEco, a cash-strapped Chinese tech conglomerate which its founder Jia Yueting has fled China to the United States.
Earlier in July credit rating agency S&P put Sunac China on credit watch with a negative implications over concerns about its acquisition strategy.
The firm is tapping multiple channels to shore up its finances. The dual-tranche deal comes just a week after the developer raised $516 million from a top-up share placement. Sunac China was returning to the international bond market for the first time in more than two years.
Of course it could count on a global hunt among investors for yield.
“The insatiable search for yield is still on globally,” Todd Schubert, head of fixed-income research at Bank of Singapore, the private-banking unit of OCBC, told FinanceAsia. “Investors are getting more widespread complacency toward risk.”
Besides Sunac China, Iraq, which is rated low “B” did its first deal in 8 years and priced inside of 7%, well below the initial price guidance. TV Azteca, out of Mexico, rated B+, also executed a successful deal that was heavily oversubscribed and also priced well inside initial guidance, said Schubert, demonstrating the risk-on appetite across the globe.
Asian G3 borrowers, including government, financial institutions and corporates, have raised $184.3 billion of debt as of last Friday, almost matching the $193.4 billion raised for the full-year of 2016, according to Dealogic, underscoring strong appetite for fixed income.
To be sure, some of the investors signalling interest in Sunac could have been opportunistic.
“The strong order book [obtained by Sunac] reflects the risk appetite among investors, but they could have placed limit orders by specifying a minimum yield they look for,” said Yin Chin Cheong, a high-yield analyst at Credit Sights in Singapore. “Some may look for a short-term trade rather than holding the paper for longer term.”
In its latest debt offering, Sunac China, rated B3/B/BB- by Moody’s/S&P/Fitch, went out with an initial price talk at "7.5% area" for its new three-year bond and "8.5% area" for the five non-call three-year bullet on Wednesday morning.
“The overall tone in the Asia high-yield universe has turned more constructive this week, so demand for Sunac has been pretty supportive,” said a syndicate banker behind the deal, requesting to speak on the condition of anonymity.
Sunac China built as much as $2.2 billion worth of demand at peak level, the person added.
The group raised $400 million from an August 2020 note at an issue price of 99.005, implying a yield of 7.25%, or 25bp tighter than its marketing range. It sold $600 million of a five non-call three note at 98.991 to yield 8.2%, or 30bp tighter than its initial price range.
Bankers used Sunac’s outstanding 2019 note as a valuation benchmark. The 8.75% $400 million 2019 note, which is callable in December this year, was trading on a yield-to-call of 7.055%.
They also picked Evergrande’s recently issued bonds as a second reference. Rated B3/B By Moody’s/Fitch, Evergrande’s 2020 and 2021 notes were trading on a yield of 6.545% and 6.949%, respectively. Its long-dated 2023 note, which is callable in June 2020, was quoted on a yield of 7.79%.
That means the new Sunac bonds paid a decent pickup of 5bp to 30bp over its larger rival Evergrande, according to a syndicate banker’s estimate.
In the secondary market, both tranches were trading a tad lower on Thursday. The 2020 bond was quoted at a cash price of 98.625 to yield 7.394%, while the longer-dated five-year bullet was trading on a cash price of 98.875% to yield 8.229%.
HSBC and Morgan Stanley were the lead managers of the deal, while China CITIC Bank International, Citi, CMB International, Haitong International, ICBC International, Industrial Bank Hong Kong Branch and SPDB International were joint bookrunners.
Sunac China and its lead managers did not release the deal statistics by the time the story was published.
As China scrutinizes the use of corporate leverage, Sunac China faces limited funding channels at home and the spillover effect of some of its recent purchase. The Chinese regulators had ordered Chinese banks to review their credit exposure to the developer, according to news site Jiemian.
Policy makers also halted some of the fundraising by Sunac at home, including a Rmb10 billion domestic debt offering and the sale of a Rmb1.5 billion trust product.
“Markets have been anxious about policy tightening and increasing scrutiny over those high-profile acquisitions,” a Singapore-based multi-asset fund manager told FinanceAsia. “The kind of deal-making is a stark warning of the risks posed by rapidly rising leverage.”
“Bond investors are concerned about the leverage level at Sunac, which may have to take care of the dire situation at Leshi as well,” the fund manager added.
Sunac founder Sun Hongbin has taken over the helm at Shenzhen-listed Leshi Internet Information & Technology, LeEco’s main listed unit, since July 21. Sun was said to pay back Rmb1.9 billion worth of two private bonds issued by Leshi Internet, mainland media Caixin reported on Wednesday, citing unnamed sources.
In response to increasing scrutiny over its bold moves, Sun Hongbing, chairman of Sunac China, penned in his Weibo, China’s most popular micro-blogging platform, over the weekend, saying his property company will speed up sales to reduce debt ratio.
Sun, a former Lenovo executive, also said he firmly believes in his recent purchases from Wanda and LeEco, as the cultural, tourism and entertainment industries will have explosive growth in the future.