(This story has been corrected to reflect that this is not a dim sum bond tapping an offshore renminbi pool, but rather a renminbi-denominated bond that is sold offshore and settled in US dollars.)
Even as the year winds down, the offshore renminbi bond market continues to reflect unquenchable investor appetite.
Shanghai-headquartered Shui On Land yesterday became the first property company to sell an offshore renminbi-denominated bond, as it priced Rmb3 billion ($450 million) worth of three-year Reg-S notes. It was also the first issuer to sell a synthetic offshore renminbi bond in the public market.
The senior bonds pay a coupon of 6.875%, at the tight end of the 6.875% to 7.125% guidance. They were offered at par and traded slightly higher after their debut yesterday evening, when they were quoted at 100.625/100.875.
Deutsche Bank, Standard Chartered and UBS were joint bookrunners on the deal.
Although the bonds are settled in US dollars, investors are taking exposure to the renminbi. If the Chinese currency appreciates against the US dollar over time -- as many expect it will -- investors will be able to capture that upside.
An impressive Rmb32 billion ($4.8 billion) order book left the deal 10.7 times subscribed and about 200 accounts participated in the transaction. About 90% of the deal was sold into Asia and the remaining 10% into Europe. By investor type, private banks took up 52%, fund managers 32%, insurers 11% and banks 5%.
This is the first time that Shui On Land, an unrated issuer, has tapped the bond market. The mainland developer, which is helmed by Hong Kong tycoon Vincent Lo, has issued convertible bonds in the past. But this is its debut in the bond market.
With a dearth of real estate issuers in the offshore renminbi bond market, finding the right pricing for Shui On Land was more an art than a science. While there are plenty of comparables for Shui On Land in the dollar bond market, including Chinese real estate companies such as Yanlord, Agile Property and Shimao Property, there are none in the offshore renminbi market.
The closest comp would have been Macau casino operator Galaxy Entertainment, which last week issued a Rmb1.38 billion three-year offshore bond at a yield of 4.625%. “In the renminbi offshore market, Galaxy would have been a comparable by credit. It would be in the same ballpark, although there is less outstanding paper from casino operators compared to real estate,” said one banker.
However, Galaxy Entertainment’s bonds are renminbi-settled, whereas Shui On Land’s bonds are settled in US dollars. As a result, Shui On had to pay more. However, a banker on the deal said that the issuer wanted to be able to remit the funds raised back to the mainland and it was easier to do so under Chinese government regulations if the bonds were settled in US dollars.
The leads initially went out with yield guidance at low to mid 7%, before revising it to 7% (+/-12.5bp). Amid robust investor appetite, the deal was able to price at the tight end (6.875%) and raise a sizeable amount of money.
“At this time of the year, it would be hard for them to raise $450 million in the US dollar market and they would be paying a higher coupon than 6.875%,” said a banker.
If Shui On Land wants to hedge its renminbi exposure through a swap, this would push up its cost by about 200bp to close to 9%. This is said to be roughly comparable with Shui On Land’s cost of funding if it were to tap the US dollar bond market directly for a three-year tenor. It is estimated it would have to pay a yield in the double-digits for five-year paper.
By way of comparison, Yuzhou Properties last week priced a $200 million five-year bond at a yield of 14%.The bonds are callable in the third year.
The overwhelming demand for Shui On Land's offshore renminbi bond puts its plans for a US dollar bond next year in question. According to a source, the company had originally planned to raise $600 million, split equally between an offshore renminbi bond and a US dollar bond.
Now, with the renminbi bond having raised more than expected, the company is looking at the loan market as an option to raise the remaining $150 million, the source added.
Shui On Land is listed in Hong Kong and develops and sells properties in the mainland.