IFR Asia, October 2009

The Guangdong property developer Country Garden has a long track record of bold issuance. Its April 2007 IPO raised US$1.9 billion, the defining transaction of a clutch of lucrative Hong Kong listings of mainland developers at that time; it went up 35% on the first day of trading and reportedly turned five founding shareholders into billionaires. Strategic shareholders at the IPO included Temasek, Malaysia’s Robert Kuok, Citic Pacific, New World Development chairman Cheng Yu Tung and Henderson Land Development chairman Lee Shau Kee.

Then there was a similarly ambitious, but wholly less successful, attempt to launch a US$1 billion bond in October 2007, a deal whose failure also caused the axing of three other dollar bonds due to price that week.

And this year it was back again, with a US$300 million 144A/Regulation S five-year bond – subsequently increased to US$375 million – that can stake a strong claim to represent the reopening of Asia’s high yield bond markets.

The latest deal priced on September 2 with JP Morgan as sole lead. Paying a mighty 11.75% coupon, it drew considerable attention and received a book of $800 million of orders, on the back of nothing more than a two-day non-deal roadshow in Hong Kong and Singapore earlier in the year.

While Country Garden drew some criticism for the pulling of its 2007 bond, head of investor relations Johnson Murr argues that the familiarity of the credit from that time helped it this time around. “Because we had planned to issue a high yield bond back in October 2007, the fixed investors had seen us before, and we had been keeping them up to date,” he says; a convertible bond from February 2008 also increased familiarity with the credit. “We’re not strangers to them and they’re not strangers to us.” On top of that, property markets in China have entered a period of a very positive outlook, with pre-sales climbing rapidly. Country Garden is, Murr says, the second highest-rated Chinese developer listed in Hong Kong after China Overseas Land and could boast a strong capital position, including a net debt ratio of only 35%, which he says helped with the deal’s reception.

That low debt level, and the fact that the group had a cash position of RMB9.43 billion (albeit RMB4.58 billion of it carried as restricted in the accounts) as of June 30, begs the question: why borrow at all? The reason has to do with the rules about use of funds for Chinese developers. Onshore money in China can only be used for building projects, not purchasing land. To buy land, you have to use internal recognised profits or offshore funding. That’s what the raising was for. Again, the need was not immediately clear since Country Garden had 43 million gross floor area square metres of land bank at the time of the deal, but the company decided it was a good time and environment to replenish.

Just two days after pricing, Standard & Poor’s downgraded the company from BB+ to BB, based on the additional debt load and weakened financial performance over the last year. And the 11.75% cost obviously raised some eyebrows, but Murr seeks to put it in context. “Some investors think it is on the high side, but we look at it this way. Before the issuing of the straight bond, most of the money was onshore except the CB at an overall 9% interest rate. So the weighted average cost of funding before issuing the bond was about 6.3%. After issuing the bond it was up to 7.4, 7.5%. So in terms of the funding cost for the group, it’s only about 1 percentage digit up.” On top of that, he says the average cost of land at the moment is RMB317 per square metre, so adding the 11.75% debt cost on top of that would add about a further RMB40 per square metre. Historically, net profit per square metre has been at least RMB600 per square metre. “So the cost in terms of using debt to buy land is relatively low compared to the value it will bring.”

Did Country Garden reopen Asia’s high yield markets? One can make a case for Matahari Finance and PLN, both launched in August, although PLN is sovereign-backed and the Matahari deal was partly an exchange facility of an existing bond. In any event, the Country Garden issue, with its oversubscription, provided indisputable evidence that the markets are open again for the right credit.

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