KWG Property tested investors’ appetite for single-B rated bonds from property companies late Thursday night when it became the second Chinese real estate company to print a dollar bond this week, following hot on the heels of Agile Property.
The deal was upsized from the targeted $300 million to $400 million despite Chinese premier Wen Jiabao’s speech on Wednesday, which subsequently led to a sell-off in China real estate stocks and bonds. Wen had said that China’s home prices are still far from reasonable — an indication that property curbs are likely to be in place for longer than expected.
Despite this, the deal attracted a $1.5 billion order book from 130 investors. The initial guidance was mid-13% and the bonds eventually priced at a yield of 13.5% — with final pricing not budging much from initial guidance. The new issue premium was said to be about 35bp. This looked generous, but according to a source, the fact that investors’ orders stayed in the book despite all the noise, and the company was able to upsize the deal and conclude its funding needs for the year was a positive outcome.
“Post Agile, at one point yields widened more than 20bp on the 10-year US Treasury from the day before partly due to the Japanese earthquake,” said one banker. “More importantly, all real estate secondaries sold off massively post Wen Jiabao’s negative speech on Chinese real estate, with Agile and KWG widening by a point intraday.”
KWG’s issue is rated B1/B+, so it was testing investors’ appetite for less highly rated real estate names. Unsurprisingly, demand was heavily driven by Asian investors, which were allocated 87%. The remaining 11% went to Europe and 2% to offshore US accounts. Private banks were the biggest buyers — taking up 40%. Fund managers took 35%, banks 14% and companies 11%.
Barclays, HSBC and Standard Chartered were joint bookrunners. The coupon was fixed at 13.25% and the bonds were reoffered at 99.112.
Elsewhere, in the dim sum bond space, Hitachi Capital on Thursday evening priced a Rmb500 million ($78 million) three-year dim sum bond. The coupon was fixed at 3.75% and the notes were priced at par. HSBC was the sole bookrunner. Barclays, Mizuho and Morgan Stanley were co-leads.
DBS revisits with sub-debt
Meanwhile, Singapore lender DBS Bank early Thursday morning priced its $750 million lower tier-2 — a rare sub-debt issue from an Asian bank. In the past, the lender has often been criticised for tightening the screws on pricing too hard, but this time round, it seems to have decided to leave a bit more on the table for investors — judging by the performance of its bonds, which tightened in the secondary markets.
The bank had tapped the market with a $1 billion five-year senior bond just last month — which helped establish a benchmark for its sub-debt issue. Bank of America Merrill Lynch, DBS and Goldman Sachs were joint bookrunners for that deal and its latest subordinated bond.
The 10-and-a-half-year bonds are callable after five-and-a-half years and priced at Treasuries plus 260bp, versus the Treasuries plus 257.5bp to 267.5bp final guidance. It attracted an order book of nearly $3 billion from 227 accounts. The bonds subsequently traded tighter at Treasuries plus 256bp in secondary markets on Thursday afternoon, about 4bp inside the issue spread.
The outstanding DBS 2017s traded at Treasuries plus 145bp and the new subordinated bonds, which mature on September 21, 2022 came 115bp wider than that, which one rival said was “fair”.
“Investors are taking subordination risk as well as the risk of the bonds not getting called after five years. But they will probably get called as there is a reset,” said the rival.
If the notes are not redeemed on the first call date, the interest rate from that date will be reset at a fixed rate equal to the sum of the then prevailing five-year US dollar swap rate and 2.229%. The bonds will be eligible for Basel III transitional treatment.
The deal was anchored by Asian investors, which were allocated 50%. US investors and European investors took 30% and 20% respectively. Asset managers took 46%, hedge funds 18%, banks 15%, companies 7%, insurance 4% and others 10%. The coupon was fixed at 3.625% and the bonds reoffered at 99.571 to yield 3.712%.
In Singapore, the Monetary Authority of Singapore this week issued a consultation paper outlining proposed rules on covered bond issuance and DBS is reportedly looking to issue a covered bond. There has so far not been any covered bond issuance out of Singapore — and much of Asia — as there is no regulatory framework in place.
Covered bonds are debt obligations issued by a bank secured by a pool of assets such as residential mortgage loans. MAS is proposing that banks incorporated in Singapore may issue covered bonds, but that the value of the cover pool should be capped at 2% of the total assets of the bank.