China’s Future Land Development is the latest Mainland property company to launch a roadshow for an offshore renminbi, or CNH, bond issue in light of more stringent conditions in the US dollar market that has made issues expensive and more volatile.
According to market dealers, Future Land Development had considered a US dollar issue to follow up its US$200 million five-year bond sold on January 24. However that deal, which yields 10.25%, has persistently traded below par and was at 98.5 by noon on April 11, attributed to a combination of over-supply in the market and the bond’s yield and size.
Future Land is now on the road speaking to investors about a debut CNH bond, given the more liquid secondary market environment for China property companies that may help it to better achieve its pricing goals.
“This might be the trend – there are a few issuers who did not manage to do a dollar-market deal but have looked towards the CNH market, which might be more open for first-time issuers,” said one debt capital market (DCM) banker away from the deal. “Pricing-wise it’s also been more competitive in the dollar market because of the flow of deals we’ve had this year. It could be more favourable for CNH issuers because there’s been less activity from this sector.”
The targeted size and tenor of Future Land’s bond has not yet been released. Bank of America Merrill Lynch (BoA-Merrill), Bank of China International (BoCI) and Deutsche Bank are the bookrunners.
Dealers say that Future Land follows in the footsteps of Far East Consortium and Dorsett Hospitality International – whose issuer parent is Far East Consortium - which both issued CNH bonds this year after nixing dollar plans.
Far East Consortium initially looked to sell a five year dollar bond in November, but decided to cancel the deal after going so far to explore guidance of approximately 5.50%, according to Asiamoney PLUS’ sister publication Euroweek Asia. Instead, it sold a CNH bond on February 25 which raised Rmb1 billion (US$161.4 million), double the size of their initial deal. That three-year deal pays 5.875%.
Hotel operator and developer Dorsett, meanwhile, sold a Rmb850 million five-year dim sum bond on March 25 after reportedly considering dollars. That deal priced at 6%, three times oversubscribed.
“Normally in the US market you have a minimum bond of five years that’s at least US$200 million or US$300 million. And now there’s a number of the property companies in the market and investors are becoming more choosey. There are smaller names that don’t carry as much appeal, especially names that may target US$200 million but may not be able to get US$200 million. Then that deal looks a bit weak,” said one syndicate banker. “In the dim sum market you can get Rmb500 million and it looks more respectable for the issuer. It looks a lot more respectable if it fills its book target, and that also makes it easier for it to tap the market again in the future.”
Another big draw is that the offshore renminbi secondary market, which was generally been less liquid than in dollars, may be more favourable to these Chinese property names.
Twenty-five mainland real estate names have tapped the US dollar market in 2013 raising a total US$9.4 billion, compared to just six in 2012 that raised US$2.3 billion, according to data provider Dealogic. This has thinned the liquidity in the secondary market for these credits, with investors finding the larger deals most interesting.
For names such as Future Land, whose dollar deal is US$200 million compared to US$800 million, US$750 million and US$500 million from the likes of Country Garden, Shimao Property and Kaisa Group, respectively, investors have less ability to trade larger-sized tranches in the secondary market.
In the dim sum market, however, retail and private bank investors have been more interested in transacting smaller-sized trades, which is more manageable for property companies that are issuing bonds in the vicinity of Rmb500 million-Rmb1 billion.
“You see activity in the dim sum secondary market from retail investors and private banks who are interested in trading smaller denominations, like Rmb1 million, which is only [US$161,350],” said the syndicate banker.
“You see more secondary activity when a CNH deal is supported by private banks, and there’s obvious interest for property companies by China and Hong Kong Inc. investors,” said one Hong Kong-based head of debt syndicate. “This is especially good for property companies because they’re high yield, which sees more trading. There’s a lack of supply of the high-grade stuff so these bonds tend to be held and there’s little churn.”
Further, the deluge of property debt early in the year has prompted US dollar issues to pay up in order to get the books covered.
The most recent of these deals came from property company CiFi Holdings. CiFi originally sought to sell a US dollar-denominated bond for approximately 11% in early March, which was scrapped after investors balked at the aggressive price expectations. It then returned on April 8 to sell as US$275 million five-year deal to yield 12.25%.
Paying up has helped: CiFi’s bond is trading at 103 in the secondary market as of April 11.
In this environment, dealers suspect more issuers will bypass dollars in favour of CNH, especially if they have need for the currency.
“We’ll definitely see more of this from China property – there’s just a lot of supply in the property sector in the dollar market which makes it tricky to navigate,” said the syndicate banker. “There are opportunities for smaller deals in particular...Issuers are all too aware of the opportunities between these markets. There can be some upside.”