Sino-Ocean Land raised $1.2 billion from a dual-tranche bond on Wednesday, breaking through the gloom that has beset the Chinese real estate sector in recent weeks and which continues to cast a pall.
The developer, which operates primarily across China’s so-called Tier-1 and Tier-2 cities, raised a $700 million five-year and $500 million 12-year note.
The five-year tranche priced at US Treasuries plus 340 basis points, which is approximately 30bp tighter than initial price guidance, according to a term sheet seen by FinanceAsia. The 12-year paper, on the other hand, priced at Treasuries plus 429.6bp, just 6bp tighter than initial price guidance, suggesting some investors may be unwilling to hold long-duration Chinese property paper.
Investment-grade Sino-Ocean’s Reg S-note comes amid rising scrutiny towards the Chinese property market. It all begun with Shenzhen-based developer Kaisa, which had several of its projects blocked by the local regulator at the end of 2014. The company also missed a coupon payment of $500 million of its dollar-denominated bond early-January.
The Chinese real estate sector’s woes were then compounded when the Shenzhen government froze a series of property projects from other developers including Fantasia and Logan Property.
Despite these concerns, Fitch Ratings in a note published on January 16 said Chinese property developers rated by the agency with offshore bonds due in 2016 have ample liquidity to redeem them or are in a position to refinance them at maturity. This includes Sino-Ocean, which has Rmb2.6 billion ($420 million) in onshore bonds due June 2015 and is rated Baa3/BBB-/BBB- by the three main rating agencies.
“These maturities are small compared with the sales generated by these companies,” Su Aik Lim, credit analyst at Fitch, said in the note, adding that the annual sales generated by Sino-Ocean is almost twice the volume of its maturing 2015 bonds.
“This shows that the Chinese developers with good-quality projects can readily raise cash from property sales to service their debt maturities,” she said.
According to a source familiar with the matter, the capital raised from Sino-Ocean's latest bond will be used to repay existing debt and for general corporate purposes.
China Life, comparables
Investors are also comforted by the fact that Sino-Ocean is of high strategic importance to Beijing-based insurer China Life, which has positioned the developer as its sole strategic real estate investment platform in China.
China Life increased its stake in the developer from 16.57% in 2009 to 29% now and is committed to owning no less than 25%. The insurer also signed a cooperation agreement with Sino-Ocean to exploit synergies in their insurance and real estate businesses.
Sino-Ocean is also owned by Hong Kong developer Nan Fung (20%) and Wharf (6%).
The closest comparables for Sino-Ocean’s five-year bond includes its existing July 2019 paper, which traded at a G-spread of 335bp.
Rival developer China Overseas Land and Investments also has outstanding notes maturing in May 2019 and November 2020, respectively, which traded at a G-spread of 225bp and 240bp.
As for the 12-year tranche, the nearest comparables include Sino-Ocean’s existing July 2024 note trading at a G-spread of 380bp. China Overseas' and Greenland Holding Group’s outstanding 2024 bonds maturing on a G-spread of 260bp and 405bp, respectively, were also used for comparison purposes.
With the curve extension worth about 10bp for the five-year and 20bp for the 12-year, fair value on both tranches as seen at about Treasuries plus 325bp and 400bp, respectively. This suggests a healthy new issue concession of 35bp to 45bp.
“With the Kaisa-inflicted wounds on the broader sector still fresh, this deal needs to come cheap,” said a Hong Kong-based credit analyst.
The five-year tranche obtained a total orderbook of $5.6 billion from 377 accounts, with 76% of it going to Asian investors and the rest to European investors. Hedge funds, and banks respectively purchased 25% each, followed by asset managers 23%, private banks 18% and insurers and sovereign wealth funds 9%.
For the 12-year tranche, the orderbook was $3.4 billion from nearly 250 accounts, with 97% of the orders coming from Asian investors. Insurers purchased 86% of the notes, followed by hedge funds 8%, asset managers 3% and the rest to banks and brokers.
HSBC, JP Morgan, Goldman Sachs and Morgan Stanley were the joint global coordinators and coordinators of the transaction. Other joint bookrunners include BNP Paribas, Bank of China, Deutsche Bank, DBS and Wing Lung Bank.