Investors have not had much chance to buy higher yielding paper for many months as firms from the sector’s most consistent issuing base, Chinese property, have been raising funds onshore.
The migration onshore is hardly surprising given that real estate companies are able to save at least a few 100bp for doing so thanks to the low rate environment in China.
Aoyuan, for example, raised Rmb2.4bn ($370m) in July 2015 with a 5.8% 2018, according to Dealogic. In comparison, the company’s existing dollar bonds before the latest trade were sold at double-digit coupons.
With the onshore market rising in popularity, there has been very little action in the offshore dollar bond market from Chinese high yield property names this year. Before Aoyuan, there had been just three trades this year for a total of $740m — a far cry from the $3.78bn recorded over the same period in 2015, according to Dealogic.
Aoyuan’s appearance on Monday was therefore a welcome reprieve for investors and that showed in the response during bookbuilding with orders coming in a frantic pace throughout the day.
Joint global co-ordinators Bank of America Merrill Lynch, Deutsche Bank and UBS launched the three year trade with an initial price guidance in 7% area, capping the size at $250m.
“The company was looking to refinance some of its dollar liabilities, which was why a dollar bond made sense even if the cost of funding is cheaper onshore,” said a syndicate banker who executed the sale. “And since it only needed the money to retire old debt and a little bit more for working capital, it didn’t want to issue more than $250m.”
By limiting the size, the leads were also sending out a message that new supply was going to be limited. That tilted the demand/supply imbalance even more in favour of the issuer, which was reflected in the way books built.
Books were covered within an hour and were multiple times covered by the end of the morning session.
Orders crossed $2.1bn in the afternoon before the leads decided to slash pricing massively, announcing final guidance at 6.625% (plus or minus 10bp).
But even that only had a very limited impact on the books as the transaction still ended up closing with $1.9bn of orders. Pricing was unsurprisingly set at the tight end for the issuer and the 6.525% 2019s were eventually sold at par.
What volatility?
The closest comparables were Aoyuan’s existing 10.875% July 2018s and 11.25% January 2019s, which are callable in 2017.
“It was an excellent result for the company because they were able to save a lot of money if you look how different the coupons on those notes are,” a second syndicate banker close to the deal said.
But the company managed to achieve more than just savings on the headline coupon. The July 2018s and January 2019s were yielding 6.47% and 6.15% ahead of the start of bookbuilding, or roughly 32bp for a 19 month gap.
Based on that, fair value for the new 2019s was found to be about 15bp wider than the 2018s. Yet Aoyuan managed to price it only 5bp wider than where the 2018s were trading.
This was even more impressive considering that market conditions were not the most conducive on Monday morning when news emerged that talks on freezing oil production had failed, causing oil prices as well as Asian equities to fall on the day.
“We knew about the oil issues and we also guessed that equities would take a hit,” the first syndicate banker said. “But we were very confident going into it because we knew the technical factor for this was so strong based on the feedback we got from several key accounts that we had wall-crossed earlier.”
Among the 87 accounts that were given an allocation, Asia took 85% of the notes with the rest going into Europe. Fund managers/insurance took 86%, private banks 11% and banks 3%.
A banker away from the sale was surprised by the lack of private banking allocation given that the credit strength and yield levels were most suitable to them.
“You would have thought there would be more private banks getting their hands on this although from a company’s perspective they probably want it to be skewed towards the real money accounts who are a lot less likely to flip,” he said. “That for me was key because for a single-B trade to get 80%-plus sold to fund managers and insurers was an excellent result.”
The bonds were trading about 99.5 on Tuesday evening.
Agricultural Bank of China International, Credit Suisse and Guotai Junan International were joint bookrunners on Aoyuan's transaction.