Shimao prices challenging $350 million high-yield bond

Shimao Property last night priced a challenging $350 million seven-year non-call-four at a yield of 11% amid growing investor concern over looming new supply.

China property developer Shimao Property last night priced a $350 million bond at a yield of 11%.

The seven-year non-call-four deal proved challenging for the leads – Morgan Stanley and Standard Chartered – as investors had concerns over the heavy calendar of issuance from China property companies and some fatigue had settled into the sector as a whole.

The initial price whisper on the bonds was in the 11% area and the bookrunners tightened the final guidance to 10.875% to 11%, with the bonds pricing at the wide end of that range and being issued at par.

The leads built an orderbook of $765 million from more than 100 accounts, but the company eventually settled for a $350 million print, despite its initial plans to raise up to $500 million.

Fund managers took 42% of the deal, private banks 38%, corporate banks 18% and others took up 2%. By geography, Asia took up 75% and Europe the remaining 25%.

Based on the early price whisper, one investor had said the deal offered a generous new issue premium and put the fair value of the new bonds at 10.75%.

“The Shimao bonds maturing August 2017 are yielding about 10.2% and, based on the 11% price whisper, the new bonds are coming about 80bp back of that for a seven-month extension. The new issue premium should be 50bp for a one-year extension, so there is some money on the table,” said one investor.

However, other investors pushed back on pricing amid rumours that other property developers such as Agile Property could tap the dollar bond market.

According to a banker on the transaction, the outstanding Shimao bonds maturing August 2017 were yielding 10.3% before the deal launched and softened to 10.5% after the deal was announced. This would indicate a premium of 50bp to 70bp for a seven-month extension depending on which yield is used.

By comparison, Country Garden paid a new issue premium of 75bp for a 10-month extension when it priced its jumbo $900 million seven-year non-call-four on February 17. It is evident from both deals that investors will continue to demand new issue premiums. Country Garden’s bonds maturing February 2018 were yielding 11.125% yesterday.

Shimao’s bonds are rated B1/BB-/BB+ by Moody’s/Standard & Poor’s/Fitch. Country Garden's issue was rated Ba3 by Moody's; one notch higher than Shimao. It is similarly rated BB- by Standard & Poor's.

Standard & Poor's yesterday revised the outlook on Shimao Property to negative from stable. “We revised the rating outlook on Shimao because of our uncertainty over whether the company can maintain credit ratios that are supportive of the current rating. In our view, Shimao's key metrics and financial flexibility could weaken, given its aggressive debt issuance and expansion,” said S&P credit analyst Frank Lu in his report.

Most of the proceeds will go towards refinancing Shimao's outstanding floating-rate notes due 2011 and other existing debt. It will use the rest for development projects and general corporate purposes.

Credit markets were stronger yesterday thanks to better-than-expected US corporate earnings and stronger equity markets. The iTraxx Asia Investment Grade Index stood at 107bp, or 3bp tighter from the previous day. Against this backdrop, another issuer, SingTel, was also in the market yesterday with its US dollar bond issue.

Late last night, SingTel launched a $600 million 10.5-year bond at Treasuries plus 113bp, which was at the tight end of the final guidance of Treasuries plus 115bp, plus or minus 2bp. BNP Paribas, HSBC and Morgan Stanley acted as joint bookrunners.

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