China’s property sector has enjoyed something of a renaissance in the global bond markets this year. Shui On Land’s original financing and two subsequent taps also helped pave the way for the return of high-yield issuers.
Source: Reuters/Romeo Ranoco
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Shui On Land has cemented itself as one of the most prominent Chinese players in the offshore debt markets over the past few years, via both the syndicated loan and primary bond markets. In its approach, despite sitting in the high-risk China property sector, the company is building a reputation as one of Asia’s savviest borrowers.
The Shanghai-based developer, which tycoon Vincent Lo Hong-sui founded in 2004, first appeared on the radar screens of institutional investors when it successfully listed in Hong Kong in late 2006. Its stock soared the following year, underlining the appeal of its franchise of developing property for sale or lease in Shanghai, Wuhan, Chongqing, Foshan and Dalian.
Shui On raised another US$262m in June 2009 in a top-up placement after markets rebounded and has since managed to keep its access to international capital, despite difficult operating conditions amid a clampdown on the property sector at home, often turning to innovative structures to attract investors.
This year, however, has been Shui On’s most high profile in the offshore US-dollar debt market, being responsible for helping get under way the mini high-yield bonanza at the start of the year with a US$400m three-year. More remarkably, Shui On subsequently tapped that deal twice within six months of the original February launch.
It added another US$75m to the 9.75% notes at par barely a week after the original issue date. It then almost doubled the outstanding issue size with a US$400m reopening at the end of July at a price of 102.785 – equal to a much lower yield of 8.5%.
Each tap offered investors a discount to the secondary market price. Shui On offered a discount of 75 cents in the first tap, while that on the far larger second tap was deeper at nearly 1.5 points.
The deals were also pinned firmly on the burgeoning bid of private banks, which took up around 60% of the reopening and earning a 50-cent rebate in the process.
There is no doubt that the approach served Shui On well in funding terms, although investors were, arguably, less well served. The bonds have been markedly more volatile since the US$400m retap.
Investors often gripe about unexpected taps, arguing that discounted reopening moves push down their mark-to-market value. In Shui On’s case, however, market participants blamed the increasingly flaky nature of the PB bid for the underperformance.
The company has been the poster child for the heightened role of the PB investor base in this year’s new issues, but its experiences also illustrate that it is not entirely a one-way street.
“Shui On has been the darling of the PBs, but this is a double-edged sword. Increasingly, we have seen that, if a deal rises by a small amount, PB clients look to flip it, particularly, if they have been offered leverage to take on the position, while they are also inclined to sell paper if it doesn’t immediately perform in secondary,” said a Hong Kong-based syndicate head.
Opportunisic approach
Shui On may have taken some of the upside off the table through its twin reopening moves, but the company’s opportunistic approach looks unlikely to dent its ability to return to the offshore markets. At the time of writing, the bonds were still well above par at a bid of 7.865%, according to Thomson Reuters pricing.
Shui On also has an impressive track record of using some unconventional twists to access the international capital markets.
When the markets were otherwise firmly closed to Chinese property developers, the company completed a US$375m three-year bond-with-warrants deal in March 2010 and a Rmb2bn five-put three-year convertible, showing its willingness to explore fundraising outside the plain vanilla universe.
In December 2010, it innovated again with the first synthetic renminbi bond. The Rmb3bn three-year, settled in US dollars, drew in a staggering book cover of 21x, of which 56% came from PBs looking to take a view on the appreciation of the renminbi. This outcome may be regarded as all the more impressive because Shui On is an unrated issuer.
From Shui On’s point of view, the deal was a smart piece of funding in that the 6.875% all-in it paid was far below where it could have raised money in US dollars. PBs again pounced on the company’s follow up in synthetic renminbi when it brought in January 2011 a four-year Rmb3.5bn trade on which it paid 7.625%.
These trades look less than stellar in hindsight, after the reversal of the renminbi against the US dollar slammed the brakes on the synthetic market. Still, the deals have widened the company’s investor base and kept its name firmly in the spotlight, while the bonds have recovered to trade around par.
Alongside its frequent bond market forays, Shui On has been a regular visitor to the syndicated loan market.
In June, the company signed a dual currency three-year loan with a HK$850m offshore tranche and a Rmb1.3bn onshore tranche. It followed up in August with a three-year loan in Hong Kong and US dollars.
With a footprint firmly established in each of the key funding markets, Shui On will have a wide range of options for its next financing.
“Shui On has shown itself to be an innovator and a savvy market timer,” said Herman van den Wall Bake, head of debt capital markets at Deutsche Bank in Singapore. “The company showed initiative in opening up the synthetic renminbi market as well as for China property issuance in Singapore dollars. And crucially, given the issuance we have seen in dollars from the China property sector over the past few months when many market participants had written off the sector, Shui On reopened that space earlier in the year.”
Its next overseas foray may be the spin-off listing of its PRC commercial property unit, China Xintiandi. The Hong Kong listing is expected to raise US$1bn–$1.5bn, even if the original fourth-quarter timeframe now looks ambitious.
Nevertheless, the surprising willingness of credit investors to embrace offshore China property issues over the past three months means Shui On is unlikely to be cold-shouldered if it returns to the offshore markets with a new deal.
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