Shanghai Zendai readies $150 million five-year bond

The property company is expected to pay a premium to investors after recent deals from China trade down.
Shanghai Zendai Property is preparing to launch its $150 million five-year fixed Reg-S bond tomorrow, having already drummed up a healthy order book, according to sources.

The deal, sole-managed by Merrill Lynch and rated B2/B+/B+, is expected to price in the 10% range, plus or minus 12.5bp, but investors are likely to demand a significant premium due to the disappointing performances of Lai Fung and China Property earlier this year. The China Property transaction attracted high levels of subscription, but unfortunately never quite took off in the secondary market, partly because of the number of high-yield bonds concurrently launched. Investors are also likely to be cautious after PakistanÆs sovereign issue traded at a discount.

So some investors are demanding at least a 10% yield for Shanghai Zendai, particularly given that Lai Fung and China Property are trading at 9.25% and 9.4% respectively.

The transaction comes shortly after China reported a crackdown on its capital gains tax collection, which is likely to have a significant impact on property sales and developer portfolios. The highly competitive Chinese property sector has suffered from a series of measures designed to slow the rapid economic growth of the PRCÆs economy. Some investors are concerned that Shanghai ZendaiÆs middle-range to high-end projects make the company particularly vulnerable to future governmental regulations.

Further, the continued leveraging of Chinese property companies is causing some elements on the buy-side to tread more cautiously in the sector.

Some pessimistic investors believe an unsuccessful deal could have significant consequences on the property sector as a whole. According to sources, it is crucial that Merrill Lynch successfully places the bonds in safe hands, and provides adequate support for the deal in the secondary market. Others believe this deal to be too small and peripheral to have any real impact.

Shanghai Zendai not only develops and manages residential properties for sale, but also develops and acquires retail office, and other commercial properties, as well as mixed-use properties for long-term investment purposes. The company based its business model on community development and various types of properties, combining different asset types to create a community complex. A balanced mix of residential and commercial properties in the same community will, the company believes, maximise the value of these properties.

The control of the company is highly concentrated, with Dai Zhikang controlling approximately 47% of the issued share capital of the company. Shanghai ZendaiÆs turnover stood at HK$1.43 billion in 2005, and HK$1.4 million in 2006. The companyÆs current property portfolio includes eight projects in Shanghai, Yangzhou, Haimen, Jilin City and Changchun.

The company's aggregate saleable ground floor area was 3.34 million square feet as at March 31. The company is substantially indebted, with a leverage ratio due to increase to around 50% over the medium term as it funds its forthcoming land acquisition with more borrowings, according to Fitch.

The proceeds of the sale will be put towards land acquisitions, and used for general working capital purposes.
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