Tapping existing bonds is a long held practice within the bond market, but there is an unwritten rule that any reopening comes after a suitable period of time has passed and only if the bond is trading above reoffer, in order to protect investors.
So when Gemdale, a high yield Chinese property company, reopened its 6.5% 2017s on February 27 for an additional Rmb300m, just two days after the original deal, it was certainly an unusual tactic. Add to that the fact that the tap was done at the behest of a single investor, and it’s no wonder a few feathers were ruffled.
Investors’ biggest criticism is that the tap creates an unlevel playing field. The unknown investor was not the only one to miss out on the original bond and other accounts were invited to join the tap.
But fairness rarely reigns in capital markets - otherwise there would not be so many deals where private banks are offered a rebate.
The fact that tapping loosens price tension in the secondary market is also a concern, but this was not the case for Gemdale. The bond, which was issued at 98.998, was trading between 98.75 and 99 on Monday this week – hardly a huge sell-off that would have hurt existing holders of the bond.
If anything, the tap is a result of Gemdale’s conscientious treatment of investors in the original deal.
The borrower needed to refinance existing bonds after a change of control put was triggered when Sino Life Insurance became the company’s biggest shareholder (with 9.808%). With such pressing funding needs, dealers were forced to issue the bond against the headwinds of emerging market outflows, a depreciating renminbi and negative China sentiment.
The 45 investors in the initial bond placed orders of Rmb1.5bn. Even though the issuer needed to raise Rmb1bn it opted for just Rmb750m. Had dealers pressed on and taken the full amount required, liquidity in the secondary market would have been extremely tight. The paper would most likely have tanked in the secondary market.
Instead, the bond was reopened to a high quality anchor investor who hadn’t managed to get their approvals in time for the original bond. Unusual, yes, but you have to work with what you’ve got. And pricing remained the same because the books weren’t opened to the public market. This removed the risk of annoying the 45 initial investors.
While multinational corporates would be wise not to follow a similar tactic, the market for smaller Asian borrowers is different. With tight liquidity in offshore renminbi and flighty investors jumping ship every time a piece of news comes out of China, a nimble and practical approach is no bad thing.