Competing international bond issues by two Chinese high-yield issuers attracted markedly different levels of demand on Wednesday as credit markets showed signs of softening.
B1/BB- rated Road King surpassed all expectations by building up an enormous $6.5 billion peak order book for its first dollar deal since 2012, while B2/B rated Fenghui Leasing managed to attract $500 million in peak demand for a debut deal.
The contrast between the two is largely down to name recognition and particularly Road King's long track record in the international bond markets, which gives investors confidence they will get their money back – always a key attribute where high-yield issues are concerned.
Syndicate bankers said the Hong Kong-listed Road King group set out with price guidance around the 5.5% level after soliciting feedback during a non-deal roadshow in Singapore and Hong Kong at the end of last week.
However, within a few hours of launch the order book was already at $3.5 billion, encouraging an aggressive tightening of initial price guidance to between 5% and 5.125% and closure of the Asian order book shortly after lunch.
“We hoped the issuer would raise $500 million,” said one banker, “but in the end they decided to upsize it by $50 million from original indications of $300 million to $400 million.
“They could very easily have priced this well inside of 5%, but they decided not to,” the banker added.
Final pricing for the $450 million three-year Reg S deal was fixed at par on a coupon of 5%. The issue entity was RKI Overseas Finance with a guarantee by Road King Infrastructure.
The final order book saw no drop off from the peak order book closing at the $6.5 billion level with 247 accounts. By geography, 87% went to Asia and 13% to Europe. By investor type, funds took 71%, private banks 17%, banks 8% and others 4%.
Proceeds are being used to redeem the group’s outstanding $350 million 9.875% September 2017 bond, which is callable on September 18. This was trading on a cash price of 102.47% on Wednesday, although bankers said it was not used as the main pricing benchmark.
“The fact is that secondary market liquidity is very thin and the primary market is setting price levels at the moment,” one syndicate banker said. “Investors' fair value estimates were also all over the place.”
Calculating fair value was complicated by a number of factors.
Firstly, the group has a split rating. Secondly, secondary market benchmarks vary widely.
Road King is also something of a hybrid credit since it has the benefit of stable cash flows from its toll road operations, but revenue generating upside from its property portfolio.
As such, the syndicate pointed to property comparables such as Agile and Logan Properties. Against all these benchmarks pricing appeared cheap.
B1/B+ rated Agile, for example, has a one notch lower rating and a 9% May 2020 bond outstanding, almost one-year longer in maturity. At Wednesday’s close it was trading on a mid-price of 112.375% to yield 4.2%.
Logan Properties has the same B1/BB- rating as Road King and a 7.7% January 2022 bond outstanding, almost half-a-year longer in maturity. This was trading Wednesday at 108.875% to yield 4.88%.
Finally, the syndicate also benchmarked the deal against China Aoyuan Property’s 6.525% April 2019 bond. This B3/B+ lower rated deal was trading at 102.875% to yield 5.375%.
Road King’s attractive pricing more than compensated for a market backdrop which noticeably weakened on Wednesday. Spreads widened about 3bp to 5bp across the board during Asian trading hours as investors took profits from the recent strong rally.
Road King is now likely to follow up its dollar bond with a debut panda issue after receiving approval to raise up to Rmb2.5 billion ($377 million) during July.
After it released its 2015 annual results, JP Morgan credit analysts noted that gross debt to Ebitda ended the year at 5.2 times and net debt to Ebitda at 4.2 times, up from 3.9 times at the end of 2014.
Fenghui Leasing brings debut
In contrast to Road King, Fenghui Leasing’s $150 million deal proved more of an uphill struggle although this was hardly surprising given the group is not backed by one of the big state-owned banks and ranks ninth in its subsector of financial leasing companies.
The group attracted a peak order book of $500 million for a three-year Reg S deal, which was issued in the name of Silver Sparkle.
Indicative pricing was pitched at 8.5% before being tightened to 8.25%.
Final pricing was fixed at 99.021% on a coupon of 7.875% to yield 8.25%.
The deal had a split of about 70% funds and 30% private banking demand.
“This was quite a unique credit,” said one banker. “It’s been growing fast, but this has put some pressure on asset quality, which the rating agencies focused on. Investors also highlighted the fact that it has quite a short operating history.”
The syndicate benchmarked the deal against trust company Zhongrong International’s 6.95% June 2019 deal. This was trading almost 300bp tighter on Wednesday at 104.125% to yield 5.38%.
Fenghui was established in 2009 and at the end of 2015 ranked as China’s ninth largest financial leasing company by capital.
Its controlling shareholder is Shenzhen-listed jewellery company, Jinzhou Cihang.
Assets have grown rapidly from Rmb3.35 billion at the end of 2013 to Rmb11.84 billion at the end of 2015 according to its online roadshow. Net profits have risen from Rmb200 million to Rmb579 million over the same period.
Debt stood at Rmb7.607 billion at the end of 2015 and non-performing assets at 2.76% compared to 0.86% in 2014.