China's Yuzhou Properties last night braved the tricky year-end market to successfully price its debut $200 million high-yield bond. The small-cap Fujian-based property developer was returning to the market after delaying its bond issue last month.
The Reg-S/144a five-year bonds, which are callable at the third year, were launched at a size of at least $150 million and eventually printed north of that. BOC International, Nomura and Royal Bank of Scotland were joint bookrunners.
The senior secured bonds offered a coupon of 13.5% and were reoffered at 98.244 to yield 14%. They were mostly distributed to Asia, with participation driven by fund managers.
Although the deal saw no participation from the US, it is an achievement for a small-cap Chinese property developer such as Yuzhou Properties to close a debut bond amid such volatile conditions. The bond is coming at a time when investors have become reluctant to participate in new deals and are wary of taking on risk.
“The market conditions are challenging. It is the year-end and we managed to raise $200 million. Most US investors are not looking at Chinese property now. We did good. Plenty of deals have been pulled, including Vinacomin and Delong. Where are those deals now?” said one banker on the transaction.
However, Yuzhou Properties had to pay up to get done, with market conditions less conducive for a high-yield bond. When the deal was marketed to investors in November, the guidance was 13% to 13.5%. This time around, the guidance was reset to 14% and the bonds priced at guidance. The expected issue rating is B2/B (Moody’s/S&P).
The comparables for Yuzhou Properties include small-cap Chinese developers Kaisa Group and Powerlong, which have both issued five-year bonds callable in the third year this year.
The Kaisa bonds, which are due in April 2015, were trading at a yield-to-maturity of 12.4% and the Powerlong September 2015s were trading at a yield of about 12.5% around the time Yuzhou Properties launched its deal. Kaisa is rated B1/BB- (Moody's/S&P) and Powerlong is rated B1/B+.
Despite the market volatility investors welcomed another issue in the China high-yield sector. “The deal is a debut issue and it should set a benchmark for smaller property names. It will be interesting to see how it goes,” said one investor.
But they were also concerned about the developer’s concentration risk. Yuzhou Properties’ projects are concentrated in two cities in China – Quanzhou and Hefei. The developer is about one-fifth the size of Agile Property and one-third the size of Yanlord Land.
The proceeds will be used to repay existing loans and to fund the acquisition of land for residential and commercial property development.
Yuzhou Properties was the second Asian issuer to return to the G3 bond market this week. On Monday night, Li Ka-shing’s Hongkong Electric quietly priced a $500 million 10-year Reg-S bond.
The bonds were priced at Treasuries plus 137.5bp, at the tight end of the Treasuries plus 140bp +/-2.5bp guidance. The coupon was 4.25%.
HSBC, RBS and Standard Chartered were joint bookrunners. This was the company's second attempt to issue a bond. On November 23, the Hong Kong electricity provider marketed a 10-year US dollar benchmark to investors with a guidance of Treasuries plus 140bp. But amid rising geopolitical tensions on the Korean peninsula, the deal was pulled.
This time around, the deal printed and performed in secondary. Hongkong Electric gathered an order book of $1.8 billion from 150 accounts. About 65% of the distribution went to Asia, while the remainder was bought by European and offshore US accounts. The bonds tightened in the secondary market and yesterday afternoon were bid at Treasuries plus 124bp.
However, the company’s $500 million print fell short of some expectations, prompting speculation the company may return to the market again. “We had originally expected a $1 billion issue and do not rule out the possibility of a tap in the future,” said Nomura analyst Jacob Samuel in the research note on Tuesday.