Longfor reopens high-yield dim sum market

The Chinese developer issued the first high-yield dim sum bond in three months, braving widespread fears of a slowdown in residential property sales across the sector.

Longfor Properties’ Rmb2 billion ($328 million) debut dim sum bonds are set to reopen the high-yield dim sum market and bring hope of fresh fundraising opportunities to Chinese developers. 

The notes are the first high-yield dim sum bonds in three months, as China’s property industry has been under pressure and there has also been a correction in the high-yield bond market around Lunar New Year.

“We might see more Chinese properties coming back to the CNH market because there is a renewed sense of confidence (after the Longfor deal),” said a DCM banker.

Chongqing-based Longfor Properties on Wednesday night priced the four-year notes at 6.75%, tighter than the indicative 7% pricing. The deal was more than three-times covered, with Rmb7.7 billion of orders from 125 investors, including fund managers (53%), private bank accounts (24%), banks (14%), as well as corporate, insurance companies and governments (9%).

The private bank account percentage is much less than that of the notes of some other property groups,  which usually hit close to 50%, because Longfor enjoys a very broad distribution of investors. There were also more investors from insurance, governments and corporate which proves its broad investor base.

The deal also carries a rare tenor of four years, the first high-yield CNH with such a tenor. As of this year, only Greentown issued 4-year notes for Rmb1.5 billion in January but the issuer was investment-grade rated.  

“Not everyone can issue 4-year notes. It needs to be a big name,” said a source familiar with the situation.  The source added that the company would like a longer-tenor than that of normal dim sums which is three years.

Moody’s on Wednesday changed the outlook for the China property industry to negative from stable, because it expects a significant slowdown in residential property sales growth, high inventory levels and weakening liquidity over the coming 12 months.

Several investment bank analysts have a negative view towards the sector. Bank of America Merrill Lynch sees a 0.23% month-on-month deceleration in home price growth and predicts that China’s property market will get worse before getting better.

However, Moody’s also said that the rated developers with larger-scale operations, prudent financial management and good liquidity will be better positioned to withstand the challenging conditions.

Longfor, with a market cap of $6.8 billion, has a strong brand name and is known for its high customer loyalty, which enables it to come with a rare tenor and attract strong investor support.

"Longfor's strong revenue growth, healthy debt leverage and adequate liquidity have balanced the impact of declining profit margin and interest cover," says Kaven Tsang, a Moody's vice president and senior analyst.

The company will continue to grow its portfolio with an aim of completing six shopping malls through 2016, which will further boost its recurring rental income in the next two years, according to Tsang.

Longfor is rated at Ba1 by Moody’s and BB+ by S&P. Proceeds of the notes will be used for refinancing and general corporate purposes.

HSBC and Morgan Stanley were joint bookrunners on the transaction.

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