Nagging questions over the outlook for US monetary policy and worries related to the Chinese property market and economy mean debt investors positioning themselves for 2014 should consider shorter-term Asian bonds, which still offer more flexibility and certainty on yield.
Since the global sell-off in bonds seen over the summer, when talk of imminent US policy tapering was rife, there has been a rush of new Asian debt issuance as companies looked to complete financing programmes before Christmas. The volume of US-dollar denominated debt hit another record in 2013.
Chinese issuers alone have increased their issuance of US dollar-denominated debt by roughly 75% year-on-year, in part helped by expectations that the renminbi will appreciate against the dollar. After all, if a company’s revenues are denominated in a strengthening currency they are likely to find it cheaper when it comes to repaying dollar debt.
Among the Chinese companies taking advantage of the window created as Fed fears subsided was privately owned real estate and entertainment conglomerate Dalian Wanda, which sold its first dollar-denominated bond on November 15.
Despite some pushback on pricing, Dalian Wanda managed to close a $600 million sale after several delays.
The issuer was Dalian Wanda’s offshore subsidiary, Wanda Properties Overseas. The offshore component worried investors. Wanda Properties Overseas initially approached the market with a five-year investment grade rated (Baa2/BBB+) bond priced at a spread of 325 basis points over comparable US Treasuries, but ended up offering 375 basis points on a 4.875% coupon.
Compared with the $500 million bonds sold around the same time by Hong Kong-listed Evergrande Real Estate Group, China’s largest homebuilder by sales, Dalian Wanda’s debut dollar bond looked cheap. Evergrande priced at 8.75% for similar five-year dollar paper but it is six notches down on the rating credit scale in single-B territory. The bonds are rated B2 by Moody’s.
Chinese property developers have been shoring up their balance sheets and hoarding cash (an estimated $25 billion according to the rating agencies) in anticipation of tighter liquidity conditions further ahead.
As a result, their dollar bonds are sought after by investors. For example, Longfor Properties’ $750 million 2016 bonds were trading well over par at 107, yielding over 6.3% for three-year paper. Moody’s upgraded Longfor’s unsecured bond rating to Ba2 in March.
Despite previous rounds of property cooling measures in China, there are no visible signs of real estate prices falling. Rather, new home prices in October in the key cities of Beijing, Shanghai, Guangzhou and Shenzhen posted their biggest year-on-year gains since January 2011. With new Chinese communist party boss Xi Jinping intent on controlling property prices while not putting a damper on economic growth, a conservative approach with real estate issuers is to take shorter maturity risks, and only with the strongest credits.
“Even if Chinese property developers’ ratings were upgraded, I’d still stick to only the blue-chip names,” said Tania Cai, a fund manager at Standard Commodity Trade Center in Singapore.
While new issues may have had to pay up, existing bond issues can also be very attractive. A derivative of the real estate theme is Parkson Retail’s $500 million bonds, which were issued in April and mature in 2018. Publicly listed Parkson Holdings is a Malaysian retail mall operator that also operates China-based retail malls through its Hong Kong-listed subsidiary Parkson Retail Group, which in turn is listed on the Hong Kong stock exchange.
Parkson Retail Group’s bonds traded at 92 below par in July as global bond markets sold off sharply. It has since rebounded to 95 below par. There’s a lot to like about Parkson Retail Group. It’s a Chinese retail play with Rmb 4.4 billion ($725 million) of cash on its balance sheet. The company’s management has indicated that they are flexible about capital-expenditures. Management is willing to delay acquisitions and store openings if needed. There are also no short-term maturities due before 2017.
While China’s real estate market may be hit by more property tightening measures, the Chinese retail sector is going strong. During China’s golden shopping week from October 1 to October 7, China retail sales grew 13.6% year-on-year according to UBS. The Parkson bonds’ BB+ rating sits right below investment grade, offering almost 6% yield for five-year paper.
For those looking for longer-dated paper, China’s state-owned enterprises (SOEs) might be a safer bet. Although China’s new economic agenda aims to make them more market-oriented, opening the door to eventual private ownership of SOEs, complete privatisation is unlikely to happen anytime soon. Yet, with Hong Kong-listed state-owned Yanzhou Coal Mining’s nine-year paper trading at 94 cents on the dollar, holding the 6.5% yield isn’t enticing enough compared to shorter dated paper from private enterprises. Yanzhou is one of China’s largest coal mining companies with over $9 billion in sales.
The US Federal Reserve has indicated that it plans to keep interest rates low even after it begins to taper its asset purchase program. Even as issuance slows down as we get closer to the holidays, more Chinese property developers are coming to market.
Hong Kong-listed Chinese property developer China Overseas Grand Oceans Group is tweaking covenants, including a change of control clause for its debut US dollar bond. The five-year paper has gone to market with a 350 basis point spread for an expected investment grade rating. Certainly investors will have to reach further down the rating spectrum for more yield but, for the same investment grade rating, Dalian Wanda offers a slightly higher spread (25 basis points) and a blue chip name as the largest commercial real estate developer in China.
As there will also be a rush of issuance when we start the new year, don’t forget to compare your options with existing ones.
