A rare perpetual bond from Chinese developer Sino-Ocean provides an enticing case study of the role that innovative funding structures can play in the Asian capital markets.
For a Chinese property developer to complete a US dollar bond in early May was no mean feat, coming amid difficult market conditions and a waning appetite for the sector. But for that borrowing to come through a perpetual bond is even more impressive, especially from a debut issuer such as Sino-Ocean Land.
When Sino-Ocean mandated banks to handle a perpetual bond in late April, the news surprised market participants. Typically, the perp instrument has been the preserve of top-tier, strong cash flow-generating entities, such as utilities. Sino-Ocean hails from China’s property sector, which is highly susceptible to efforts by mainland regulators to tighten monetary policy to dampen inflationary pressures. It was also an unrated issuer with no track record in the international debt capital markets, and few would have bet on its success. Yet, a couple of weeks later, in early May, Sino-Ocean had successfully priced a US$400m perp non-call five offering to become the first Chinese property developer to raise funds via the hybrid product.
Sino-Ocean’s rationale for structuring the deal as a perp was no different from the reasons that prompted other Asian borrowers to raise funds through the instrument. Hong Kong conglomerate Cheung Kong Holdings, ports-to-telecoms group Hutchison Whampoa and commodity trader Noble Group had each opted for perpetual maturities on deals sold towards the end of 2010.
“The rationale for Sino-Ocean Land to issue a perpetual bond was strong as it offered a more attractive alternative than a dilutive equity issuance. The issuer is not rated by any of the international rating agencies and sought to structure a fundraising that did not impact its leverage or debt covenants. The key requirement was, therefore, to achieve equity treatment under International Financial Reporting Standards,” said Sean McNelis, head of financing solutions group for Asia Pacific at HSBC.
The perp, which received 100% equity treatment, priced on May 6 amid a general widening of spreads that forced other issuers to postpone their fundraisings. This was not surprising, however, as the deal generated an order book of US$1.1bn from 55 investors due to its investor-friendly structure.
The paper priced at par with a coupon and yield of 10.25%, equating to a spread of 831bp over US Treasuries and making the deal the highest-yielding perp from an Asian issuer in the dollar market. Furthermore, it pays a 300bp coupon step-up after year five, as well as offering a rate reset based on the performance of the Treasury benchmark – a feature unique to Sino-Ocean’s perp. All other perp transactions in Asia feature step-up in coupons after year 10.
“The structural features of the Sino-Ocean perp ensured that we were able to date synthetically the financing for bond investors (through a coupon step-up and rate reset at year five), whilst, at the same time, achieving equity treatment for the issuer,” McNelis added.
Another lure for investors was the additional 300bp step-up in coupon in the event of a change of control in Sino-Ocean’s shareholding. China Life Insurance owns 24.07% of Sino-Ocean, while Nan Fung Group, a Hong Kong conglomerate with interests in textiles, property, shipping, construction and finance, holds a further 12.84%.
That proved enough to convince investors to participate even as China’s authorities were showing their determination to cool property prices. A series of policies introduced earlier this year were designed to crimp demand for new homes, including steps to restrict citizens from buying multiple properties and much tighter conditions on bank lending.
Although it had no presence in the debt markets before May’s perp, Sino-Ocean is not a newcomer to the international capital markets. In July 2010, it raised US$900m from a perpetual convertible bond with no fixed redemption date and no investor put option, thereby allowing the fundraising to be treated entirely as equity. The deal was the first of its kind from an Asian corporate issuer outside Australia and Japan. It was also the largest equity-linked fundraising in the region in the two years prior to the completion of the deal.
No doubt, that deal paved the way for the perp bond, introducing Sino-Ocean to an international investor base and showcasing its innovative approach to funding. The deal was increased from US$650m to US$900m.
Sino-Ocean’s success with the perp bonds also mirrored the outcome Cosco achieved on its sale of a HK$5.32bn (US$683.8m) block of Sino-Ocean stock last December, which priced at a premium to the last close. The premium pricing came in a market, where even heavily discounted share offerings were difficult to sell ahead of the year-end.
Sino-Ocean has timed its own financings well, raising US$1.3bn in less than a year. The following it enjoys among investors is a reflection of its status as one of the largest developers in Beijing and among the 10 biggest listed property companies in Hong Kong. It completed its Hong Kong IPO exactly four years ago when it successfully raised HK$11.94bn.
The developer’s quest for innovative funding is far from over. Its latest initiative is a US$140m fund established with US private equity firm Kohlberg Kravis Roberts to invest in mid- to high-end residential developments, as well as other projects, throughout China.
