Sun Hung Kai Properties raised a $400 million 10-year callable note equipped with an interest rate reset similar to a floating rate note in the fifth year – the first of its kind in Asia.
The innovative structure – which resets at prevailing six-month dollar Libor plus a spread of 193.2bp in year five – drew investors’ attention, leading to the deal pricing much tighter than expected.
The transaction also achieved a yield that was 100bp lower than where an ordinary 10-year bond would have come, say market participants. For example, Sun Hung Kai’s existing 10-year 2023s were used as comparables and were trading at a G-spread of 175bp, indicating that a new 10-year transaction would come at a yield of 4.45%.
However, the Hong Kong-based property company’s note came with a yield of 3.55%, and priced 20bp tighter than its initial price guidance of Treasuries plus 205bp – the tighter end of the revised final guidance, according to a term sheet seen by FinanceAsia.
Investors are worried about the interest rate outlook, especially with Federal Reserve tapering kicking in this year, note market experts. But Sun Hung Kai’s structure – which offers a fixed-rate coupon for the first five years and resets over the floater – addressed this concern.
From an execution perspective, Sun Hung Kai’s deal was well timed as it was the first and only dollar transaction to come to market in more than a week. As a result, the transaction was able to get full investor attention, coming ahead of expected supply in the remaining three days of the week, add industry experts.
On Wednesday alone, four dollar-denominated deals have been announced: New World Development is out with a dollar benchmark seven-year note with an initial pricing of Treasuries plus 340bp, Indian Railway Finance Corp is also out with a dollar benchmark five-year bond with an initial pricing of Treasuries plus 265bp.
Other names include China Properties Group and Jingneng Investment Group’s dollar benchmark three-year bullets that have an initial price guidance of around the 12.75% area and Treasuries plus 245bp respectively, according to unnamed sources.
The last dollar-denominated bonds that came to market were Agile Property’s $500 million five-year bond with a callable option in year three and Malaysia Export-Import Bank’s $300 million five-year sukuk, both of which priced on February 10.
Large order book
Sun Hung Kai’s note – which is a drawdown from its existing medium-term note programme – achieved an order book of $2.6 billion from more than 150 investors. The oversubscription allowed the issuer to upsize the transaction to $400 million from an original target of $300 million, note market participants.
Also, a large proportion of high-quality institutional investors subscribed to the notes with fund managers purchasing half of the paper, followed by financial institutions with 23%, sovereign wealth funds and supranationals with 15% and 7% to insurers, according to the term sheet. Private banks accounted for 3% of subscription while 2% went to corporates.
The unique structure of Sun Hung Kai’s bond allowed it to outperform in secondary markets, tightening by 10bp to Treasuries plus 195bp, according to Bloomberg data.
HSBC was the sole bookrunner for the A1/A+ rated note.