Shui On breaks property supply silence

The Chinese developer launches a $500 million high-yield bond, defying global investor fears towards mainland China's fragile property market.

Shui On Land raised a $500 million three-year note late on Monday, breaking a recent drought in the supply of Chinese property-related high-yield paper.

With investors cautious about the outlook for China's real estate market, the Hong Kong-listed developer paid up a little for the privilege based on where its outstanding bonds were trading. 

“[The bond] looks attractive compared to Shui On’s existing curve given the pick-up to its longer-dated 2018 [notes] and the extension risk associated with its perpetual,” a Hong Kong-based credit analyst said.

The Reg S-only, unrated issue was priced to yield 8.7%, at the tighter end of final guidance and 30 basis points tighter than the 9% targeted initially, according to a term sheet seen by FinanceAsia.

The nearest comparables are Shui On’s existing 2018 notes, which before the deal was announced were trading at 100.5 for a yield of 8.52%, according to a source familiar with the matter.

Other comparables include the developer's outstanding senior perpetual bond callable in December 2017, which was trading at a yield-to-call of 10%.

Despite the yield pick-up from its latest bond issue, credit analysts warn that Shui On is struggling to reduce its debt burden currently and see little upside since sentiment towards Asian high-yield debt is currently a bit lacklustre — a sign perhaps that some investors are already slowing down activity for the year and looking towards 2015.

The overall high-yield debt market was broadly unchanged last week. Chinese industrials underperformed, the oil and gas sector especially, Kenneth Ho, credit analyst at Goldman Sachs said.

The Chinese property sector accounts for 47% of Asia ex-Japan’s high-yield debt issuance so far this year, which currently stands at $23 billion, according to Dealogic data. But the region has only seen four Chinese property deals totaling $1.5 billion since August 1, according to Mizuho Securities.

Property slowdown

The “slowdown in the property sector has been a major drag to [China’s economic] growth,” wrote Ting Lu, Bank of America Merrill Lynch’s head of Greater China economics, in a research note on October 30.

Contracted property sales by gross floor area in China fell 9% year-on-year in the first nine months of 2014, compared with a 23% rise in the same period last year, data from the National Bureau of Statistics showed.

All this was a consequence of the Chinese government’s tightening in lending to property developers and buyers in April 2010 in order to prevent asset bubbles from expanding.

But the Chinese government has since signalled that it plans to reverse course on home financing, with the People’s Bank of China on September 30 relaxing the mortgage rules for home buyers who have paid off existing loans.

Shui On could be taking advantage of this trend.

“The more bullish investors believe that the Chinese government is determined to support the property sector, as evidenced by policy loosening, therefore they believe default risks are likely to remain low,” Goldman Sachs' Ho said.

“[But] the more cautious investors believe that the issues around excess inventory and high leverage amongst China property developers will continue to be a drag on the sector, despite recent policy easing,” he said.

In the first half of 2014, Shui On posted a revenue of Rmb5.2 billion ($900 million), or a 52% increase year-on-year. The firm’s debt-to-capital has also increased to 52% from 49% during the same period.

The proceeds from its latest bond sale, which received a total orderbook of $2.6 billion from over 150 accounts, will be used for refinancing and capital expenditure purposes, according to the prospectus.

Private banks purchased 62% of the notes, followed by fund managers 35% and others 3%. Asian investors subscribed to 90% of the paper, while the rest went to European investors. 

Bank of America Merrill Lynch, BNP Paribas, Credit Suisse, Deutsche Bank and Standard Chartered were the joint global coordinators and bookrunners of Shui On’s deal. 

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