Few real estate companies in China can stake claims to having as strong a following among investors as Shimao Property Holdings. Among its peers, Shimao stands out for its ability to have raised funds even during testing times.
Intervention to cool down China’s rampant property prices in March this year almost killed all investor appetite for the sector. Any fundraising, especially in the international debt markets, seemed almost impossible to push through. Conditions remained all but impossible from May until the end of July, when Shimao re-opened the markets with its US$500m 9.65% Reg S bond to signal the return of appetite for the PRC real estate sector.
The seven-year non-call four bonds attracted an order book of US$3.7bn from more than 240 accounts, underscoring the appeal Shimao holds among investors. Even without anchor participation from US investors – leads HSBC, Morgan Stanley and Standard Chartered chose to forgo 144a documentation requiring more recently audited financials – the deal more than comfortably crossed the finish line with two-thirds of the demand coming from Asia and the bulk of the remainder from European investors.
Over half of the deal went to asset and fund managers, and a third to private banks, pointing to Shimao’s broad appeal. The bond also came on the back of a popular US$460m three-year loan that was increased in size from an original target of US$400m after drawing the participation of 13 banks. The deal paid a top-level all-in of 310bp over Libor, based on an average life of 3.55 years.
“These fundraisings were Shimao looking at different borrowing options and choosing the most appropriate at given times,” said one debt syndicate head. “First, there was the stop-gap financing, or the leg-up, and, then, the bold benchmark borrowing to take care of its funding for some time to come, hopefully for Shimao until the government eases its grip on domestic lending.”
Shimao, meanwhile, is not sitting back and waiting. It is still building. Just as it wants to keep investing, possibly acquiring projects when the opportunity comes along, it intends to retain a presence in the capital markets so that it can continue to borrow when needed.
Its approach has been quite focused and Shimao revised its strategy long before market conditions changed.
“Affected by the central government’s regulatory measures, the property market fell into a period of deep sluggishness with reduced transactions, [but] the property market of many second- and third-tier cities – where most of the demand was for self-use – was generally stable,“ Shimao Property chairman Hui Wing Mau explained in August, when commenting on the company’s interim results for the first half of 2010. Shimao posted an increase in revenue of 102% over 2009 and a rise in operating profit of 72% to more than Rmb3.8bn.
In fact, Shimao shifted its attention to second- and third-tier cities as early as 2006.
“It exploited the potential of the second- and third-tier cities in the course of urbanisation and avoided the business concentration risk associated with a single district or city,” said Hui.
Shimao is also better known in the international capital markets than many of its peers, thanks to a history of benchmark transactions. In December 2006, it brought US$600m five- and 10-year Reg S bonds that marked the longest tenor international paper for a property borrower from China. To date, the feat remains unmatched.
Hui believes that “recognition by the international capital markets will form an essential element to the long-term success of Shimao Property”.
This was evident in its US$460m loan, which closed at a time when the PRC government was tightening its credit policy towards the sector in an effort to cool house prices. In successfully tapping the offshore loan markets, Shimao not only managed to meet its financing needs for existing projects, but also for new projects and landbank acquisitions.
In mid-September, Shimao passed another test to its reputation and strategy when bondholders agreed to covenant changes allowing the company to set up more joint ventures through its subsidiaries without breaching the limits on lending that the authorities imposed. The amendments bring the terms of the US$600m bonds issued in 2006 in line with the US$500m bonds issued in July, giving the company more flexibility to pursue its business strategy.
“China is witnessing unprecedented urbanisation, which will definitely drive the development of the real estate market in the long run,” said Hui. “We will not miss and will certainly seize any development opportunities that arise during such course.”
Nick Parsons