While bankers working on the deal were confident about the credit following a roadshow earlier this month, the heightened volatility in the market has all but shut down high yield issuance this year, meaning joint global co-ordinators Credit Suisse and Standard Chartered were anxious about getting the time right for a debut issuer in an unfamiliar sector.
“We were very nervous about the Asian high yield market in general as negative headlines coming out of the Chinese real estate sector, such as Kaisa, were spoiling the January party mood,” said one head of capital markets working on the deal. “Although it is a different sector, we were concerned that CAR could be negatively affected.”
But after two weeks of closely watching the market, the leads finally opened the Reg S/144A five year non call three trade on January 28, with initial price thoughts set at 7% area.
The starting level drew some criticism from bankers away from the deal that it was too generous, but one banker on the trade defended it by saying the issuer wanted to reflect the pricing level that its key investors wanted — which was 7%.
Investors certainly liked the guidance, as the order book reached more than $1bn in less than two hours after launch. This momentum carried on throughout the day, allowing the leads to tighten guidance to 6.375%-6.5% area at around 6pm.
The much tightened final guidance proved no deterrent, and orders continued to pile in as US investors got their first chance to assess the bond.
Encouraged by the mass of orders, the borrower decided to increase the size of the deal from to $500m, up from original target of $300m.
The bond was priced at 98.944 to yield 6.375% with a coupon of 6.125% with the final order book standing at over $7bn from 340 accounts.
US participation
“Seeing the strong participation of the US funds, we thought the delay was worth it,” a syndicate official at one of the leads said.
US investors were allocated 35%, while Asia took 45% and Europe 20%. Bankers on the deal called the split ideal and balanced.
“The deal aimed for US investors but the investor-friendly initial pricing guidance attracted a lot of Asian accounts, which led the momentum in bookbuilding,” said a banker away from the trade. “This is a debut issue from the entire sector, but I think Asian investors all took comfort in the strong ties the issuer has to the US.”
As it was the first international bond by an Asian auto rental company, bankers on the deal struggled to find direct comparables.
“That is another reason we gave investors more time, as they needed to figure out where the fair value for CAR lies,” said the second banker. “Geely and Nexteer were chosen as comparables just because they are in the same sector as CAR, and Avis and Hertz in the US are very large, established companies, which makes it quite difficult for us to use them as direct comparables for the new deal.”
The CAR deal was pitched against Geely Automobile Holdings’ 5.25% $300m 2019s, which were seen at 5.006%, and Nexteer Automotive’s 5.875% $250m 2021s, which were seen at 5.52%.
“Although I see it as a 100bp premium over a new Geely, they landed on the level investors wanted — low to mid 6%,” said a banker away from the deal. “The upsize, high US participation and its secondary performance are all very encouraging. Hats off to the leads.”
The bond was trading at 100.5 on Thursday afternoon.
Real diversification
Bankers on and away from the deal agreed that the success of CAR’s debut offshore bond could have a broader impact in the Asian high yield market. “The Asian HY market took a huge blow from Chinese property developers, but it is great to see the market gradually picking up confidence in getting the deal done with success,” said a Hong Kong based syndicate official away from the deal. “CAR also opened a new segment and, with this deal, I hope to see real diversification away from the Chinese real estate sector in the Asian high yield market.”
By investor type, fund managers took 85%, followed by private banks and corporations 9%, insurers 4% and others 2%.
The notes were rated Ba1/BB+/BB+, where the issuer’s own ratings stand.
Proceeds will be used to fund capital expenditure and other general corporate purposes, including refinancing outstanding indebtedness, to enhance capital structure.
Deutsche Bank was also a joint bookrunner and joint lead manager together with the leads.