China property firm Renhe Commercial Holdings Company priced $300 million of senior five-year 144A/Reg-S bonds late Thursday. The bonds are set to mature on May 18, 2015 and will be callable after three years.
The bonds priced with an 11.75% semi-annual coupon and were re-offered at 99.080, which is equivalent to a 12% yield. Initial guidance was announced a day earlier (May 12) in a range of 0.25 percentage points above or below 12%. At that time the bookrunners also flagged it as a benchmark-size bond. By Thursday the guidance was revised to 11.75% to 12% with the size of the deal confirmed at $300 million. In the end, the deal priced at the wide end of the final guidance to yield 12%.
The arrangers managed to secure a $760 million order book from 57 accounts. Asian investors represented 90% of the book, European investors 7% and offshore US investors 3%. Retail banks were allocated 73%, funds and asset managers 20%, banks 5% and insurance houses and other types of investors took 2%.
Towards the close of Friday's session in Asia, the bonds were trading at a price of 99.5 to 99.
Renhe had conducted quite an extensive roadshow that had the arrangers speaking with investors for two days in Hong Kong (April 29 and April 30) and a day each in Singapore, London and Boston (from May 3 to May 5). Renhe had initially looked to come to market at the end of the investor talks, but given the volatility in the markets during the course of that week, the company held off until a more stable window for pricing was available.
With the influx of China high-yield property issuance over the past three weeks, some market observers viewed there to be an oversupply of paper that was overwhelming the investor base. On top of this, the ongoing uncertainty about China's tightening of regulations in the domestic real estate sector was adding to the volatility in Asian markets. To price against this backdrop looked like a case of 'no time is a good time'.
Indeed there were questions like "will this market allow the deal to price and are there investors willing to put cash to work?" Accordingly, it was a case of finding a yield that the market was willing to accept, one banker said.
Another banker close to the deal noted that the credit is not a normal Chinese property company. "It doesn't buy land at one price, develop it and sell it at a second price and make (a profit on) the difference," the banker said. Instead, Renhe is contracted by the local governments to build civil air defence shelters, which it then leases for (typically) 40 years and develops into underground malls. This, in turn, results in a very cash-generative business with less underlying volatility.
Renhe is the last among the publicly announced deals from the China high-yield property sector to come to market after Glorious Property Holdings decided to pull its proposed notes late last month. And with the prevailing uncertainty, it may pay for potential new issuers sitting in the wings to hold off until the markets stabilise somewhat, or alternatively aim for intra-day deals in order to minimise the risk, secure a good book and ensure some relatively good performance in the secondary market.
The Renhe notes have been rated Ba2 by Moody's and BB by Standard and Poor's. It is expected that the proceeds will be used to finance existing projects, acquire new projects and for working capital requirements.
The bookrunners were BOC International, Bank of America Merrill Lynch, J.P. Morgan and UBS.