Kaisa Group (stock code: 1638.HK) has managed to raise funding in the debt capital markets (DCM) easily this year, selling a few CNH-denominated bonds at a much lower cost in the first half than it had back in 2010. But this was a combination of good timing and the rapid growth in the property developer’s size.
“Size does matter in this space,” said Lai Ling Tam, vice chairman and executive director at Kaisa to Asiamoney PLUS on September 16. “Since we got listed back in 2009, we wanted to increase the scale of our operations because otherwise it would be very difficult for us to gain access to the capital market – both equity and debt products.”
The real estate developer hopes to attain Rmb22 billion (US$3.6 billion) of sales this year. It has so far achieved Rmb15 billion year-to-date and still has ample products to release. In 2014, the company hopes to achieve Rmb30 billion of sales, equalling it with other medium-sized developers including Guangzhou R&F Properties and Hysan Development.
Because of the increase in the group’s size, Kaisa will be able to lower its overall capital costs. In fact, the developer accessed the bond earlier this year for refinancing purposes and does not have any more refinancing requirements until 2016.
For example, Kaisa was able to raise a Rmb1.8 billion three-year dim sum note at 6.875% in April, which it then successfully swapped into US dollars, paying an all-in after-swap cost of just 5.65%. The developed also raised a US$550 million 8.875% five-year bond in March.
The pricing of Kaisa’s new debt is much lower compared to several years ago. In 2010, it made its dollar debut through US$350 million five-year 13.5% bond, while it sold a three-year Rmb2 billion note at 8.5% back in January 2011.
“You can see that funding costs have come down partly because the overall market conditions have improved and also because our scale has increased,” said Tam. “We also realised that it is important to time our maturity profile so that we are not subject to any refinancing risk and we can expand our business again.”
“If you just wait, it could go the other way and then we would have to hold off on everything,” he added.
Ever since Kaisa launched its liability management programme in the fourth quarter of 2012, it has been able to extend its maturity profile from 2.2 years on average before to close to four years currently.
And although Kaisa has the capacity to lengthen its maturity profile further, Tam notes that the company must be willing to pay up and that shareholders must be comfortable to take on that additional risk.
“Of course I would want [our maturity profile] to be longer but it will be at the expense of funding costs,” he said. “I could have done a 10-year transaction when the market was really robust back in March or April, and I would just have to pay under 10%. But I need to balance the interest of managing our balance sheet as well as the interest of our equity holders.”
CNH onshore remittance woes
All of the CNH proceeds Kaisa raised offshore will be converted into US dollars, and hedged using swaps. The developer cannot freely remit offshore renminbi onshore mainly because it has not obtained a State Administration of Foreign Exchage (Safe) approval and does not plan on getting one.
The dollars remitted onshore will be converted back into the Chinese currency, highlights Tam.
“If I want to raise a bond, I will do it right away when the window of opportunity is open,” he said. “I don’t want to wait for a Safe approval to do the transaction. When you get involved in government approvals, it could take months, if not years. We need to cut as much downtime as possible.”
Also Kaisa is not allowed to raise onshore bonds, because it’s an overseas incorporated entity – Cayman Islands to be precise.
While it can use one of its China-based subsidiaries to raise onshore funding, they have to have strong financials prior to obtaining approvals from Chinese regulators, which will also be time consuming.
Despite China’s strict regulatory environment, Kaisa has learnt to work around the restrictions.
“I personally prefer China to have some regulatory approvals because it will provide the country a much more conducive environment for long-term development,” said Tam. “But so long as the approvals are not draconian, we will be able to cope with that. I think policy is a good thing, otherwise the property bubble would have burst already.”
Originated in Hong Kong and established in 1999, Kaisa is a large-scale property developed in China with its headquarters located in Shenzhen. The group was successfully listed on the Main Board of The Stock Exchange of Hong Kong in December 2009.