Shui On closes investor-friendly senior perpetual

Shui On Land's $500 million senior hybrid is a good deal for investors. But perhaps less so for its lenders.
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Shui On's vision for the International Commerce Centre in Chongqing
<div style="text-align: left;"> Shui On's vision for the International Commerce Centre in Chongqing </div>

Property developer Shui On Land priced a $500 million perpetual on Monday night, the second senior hybrid to price in the dollar space after China Longyuan Power late last week.

Cheung Kong Holdings has issued local-currency senior hybrids in Hong Kong and Singapore, but senior perpetuals had been rare in the dollar space until now.

Shui On’s bond, which is callable after five years, was investor friendly — it offered a 300bp step up in the fifth year, a juicy 10.125% yield and rate resets. The perpetual also offers a 300bp step up in the event of a breach of covenant or change-of-control.

It went on to perform solidly in the secondary market, rising above par. The fact that an unrated name such as Shui On Land managed to close its hybrid is testament to the strong market conditions — and debt bankers are predicting more hybrid issuance during the first quarter next year.

Shui On Land was clearly not using the hybrid structure to maintain its credit rating — a popular reason for such deals. Instead, one source suggested that it was issuing a perpetual, which gets 100% equity accounting, so as not to breach loan covenants.

However, in a liquidation situation, the senior hybrid would rank on par with the senior loans extended by banks to the company — so from the standpoint of the numerous banks that lend to Shui On Land, having a senior perpetual only increases the amount of outstanding senior debt that needs to be paid out if the company enters liquidation.

“The banks lending to Shui On Land are at the losing end; they are getting a lower margin than what Shui On is paying its bond investors,” said a source. “The hybrid is counted as equity but it is also considered senior debt.”

The perpetual resets at the fifth year and every five years at a spread of 948.7bp over the prevailing five-year US Treasury yield, with an additional 300bp step-up at the fifth year. The deal attracted a $2.8 billion book from 140 orders. Asian investors were allocated 92% and European investors 8%. Private banks took up 55%, fund managers 36%, banks 7% and other investors 2%.

Deutsche Bank, J.P. Morgan, Standard Chartered and UBS were joint bookrunners.

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