Oceanwide Real Estate International sold a debut $320 million five-year bond on Monday, beefing up its warchest as it looks to plough more investments into the US market.
The Reg-S offering, which is callable in year three, is the first Chinese property high-yield bond to hit international debt capital markets after a month-long earnings season hiatus.
Oceanwide's note, its first ever, is guaranteed by its onshore parent and offshore 100%-owned subsidiary, Oceanwide Holdings (Hong Kong). The developer’s onshore parent, which owns 73.67% of Oceanwide, has provided a keepwell deed to ensure sufficient liquidity for timely payment of the notes.
“The presence of an onshore guarantee is positive from a credit perspective, with the bond proceeds to be used for overseas general corporate purposes,” said Mark Reade, Asian fixed income trader at Mizuho Securities, adding that it is consistent with China’s State Administration of Foreign Exchange’s recent relaxation on cross-border guarantees.
In December 2013, Beijing-based Oceanwide made its first foray into the US market by acquiring land for a mixed-use project in downtown Los Angeles for a price of no more than $200 million. The developer plans to develop a five-star hotel, apartments and retail space.
Oceanwide's high-yield bond comes amid a time when a number of China property developers' first half results showed rising leverage, prompting investors to maintain a neutral view on the sector and a bigger preference for stronger real estate credits.
Last week, China property developers underperformed and although the space overall ended the week broadly unchanged, several credits saw sizable selloff after disappointing results in the first half, Kenneth Ho, credit analyst at Goldman Sachs said.
Jingrui Holdings was the last Chinese real estate company to issue a high-yield bond. On August 1, it priced a $150 million five-year note, callable in year three.
Space for growth
The B rated bond priced at 12%, which is close to its initial price guidance of low-12% area, according to a source familiar with the matter. The coupon for the offering is 11.75%.
Credit analysts are confident that the bond will continue to trade well in secondary market, despite recommending investors to stay away from single-B property credits at the moment given challenging market conditions and tight onshore lending.
This is because Oceanwide’s note offers decent relative value versus its nearest comparables that are also highly levered but have quality properties in top-tier cities, a credit analyst said.
The nearest comparables for Oceanwide’s transaction include Future Land’s existing B1/B+/B+ rated bond and Hopson Development’s outstanding Caa1/CCC+ rated paper expiring in 2019 and 2018 respectively, which were trading at yield of 10.51% and 11.89% prior to announcement, according to a source close to the deal.
“While we do worry about Oceanwide’s high leverage, considerable trust exposure, project concentration, negative operating cash flow and recent offshore expansion, we think 12% area is reasonable compensation for those risks, given the company’s high Ebitda margins and high quality land bank which provide some financial flexibility,” the analyst said.
Over two-thirds of the company's land reserve is in one project at the central area of Wuhan — the project has over 8 million square meter gross floor area. Another major project is at a prime location in Beijing and has a gross floor area of 2.2 million square meter, or 17% of the company's total land bank.
Standard & Poor’s expects the developer’s debt to grow 20%-30% over the next two years to fund rising construction and delivery needs. As of the end of 2013, 54% of the company’s total debt was from trust borrowing, which is costlier than construction loans.
Oceanwide’s refinancing risk for its debt maturities of more than Chinese Rmb16 billion ($2.61 billion) in 2014-2015, as of the end of 2013, could increase if contract sales dip significantly from the company’s budget.
Despite these concerns, the rating agency believes that Oceanwide will improve its property sales and maintain its profit margin above its peer average over the next 12 months. The company’s recent sales momentum is positive with contract sales reaching Rmb1.9 billion, an 11% increase year-on-year, in the first half of 2014.
Established in 1989 and listed on the Shenzhen Stock Exchange in 1994, China Oceanwide Holdings Group is one of China’s largest private sector conglomerates with investments in property, financial services, energy and media.
Citic Securities International and UBS are the joint bookrunners of the transaction.