Thursday, 18 July 2019

Nimble moves

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Kaisa Group was at the head of a high-yield resurgence in 2013, with a US dollar bond in January and a hugely oversubscribed Dim Sum offering in April.

A five-year-old girl performs some basic skills during a training session at a Peking opera art school in Beijing.

Source: REUTERS/Jason Lee

A five-year-old girl performs some basic skills during a training session at a Peking opera art school in Beijing.

Kaisa Group deftly managed its debt portfolio this year and the popular property developer did so from the very start of 2013.

Based in the southern Chinese city of Shenzhen, Kaisa was the first foreign issuer in Asia to offer dollar bonds this year, beating Korean investment-grade issuers and sovereigns – usually the first out of the gates with such offerings.

It is not just the speed with which it came to the market that made Kaisa stand out, but also the fact the developer managed to extend its debt maturity profile, while achieving cost savings through three visits to the international markets.

The moves were designed to aid the Single B rated company to refinance debt with call options, according to Dr LL Tam, Kaisa’s vice chairman and executive director responsible for the group’s financial strategy.

“The theme for this year was liability management,” Tam said. “About three years ago, we did a number of transactions and some of the debt will come due in 2014 and 2015. Therefore, we wanted to do refinancing. In particular, we have options to call them earlier, so we utilised the window to time the maturity profiles of our debt.”

Kaisa’s trailblazing offering on January 3 2013 was a US$500m seven-year non-call four-year Reg S offering priced to yield 10.25%.

A 144A/Reg S issue followed in March, where it was able to leverage the demand for the first transaction to attract US investors. The five-year non-call three bonds of US$550m were priced to yield 8.875%

Finally, there was an offering of Rmb1.8bn in Hong Kong this April, when it priced three-year Dim Sum bonds to yield 6.875%, after drawing an order book of Rmb22bn, the largest for a high-yield issue at that time.

In addition to securing financing, the offerings allowed Kaisa to lengthen the duration of its debt to almost four years from 2.2 years, according to Tam.

The developer’s swift moves in the debt markets – all within the first four months of the year – showed the way to other Chinese property developers.

“Kaisa is a very savvy issuer and very proactive in monitoring markets. It also did a very smart thing by broadening the investor base and selling bonds in the US,” said a banker close to the deals. “The company can read markets well, as it gave investors duration when they were looking for duration.”

In addition to moving first and lengthening maturity profiles, the issuer also substantially lowered its funding costs.

Three years ago, Kaisa sold five-year bonds to yield 13.5%, while its five-year dollar transaction in April yielded only 8.875%.

The demand for all three bonds – not just the Dim Sum paper – was also quite strong. The seven-year bonds attracted an order book of US$9.9bn for a US$500m offering with asset managers buying 84% of the transaction.

The second dollar bond attracted a book of US$10bn for a US$550m offering. US investors bought 27% of the bonds and, within that, fund managers purchased 76%.

“Back then, the paper from Latin America was yielding around 3%–4%. So, anyone who was willing to offer high single digit was very attractive to US investors. I got a remark from them – why don’t you come often?” said Kaisa’s Tam.

The issuer not only achieved lower funding costs through its dollar issue, but the huge order book for the Dim Sum offering also allowed Kaisa to price that offering cheaper than the dollar funding cost, bankers said.

However, the issuer is not planning to come to the market often, however, as it is cognizant of managing its leverage ratios. The three bonds this year increased Kaisa’s net gearing ratio to 82.4% from 66.8% at the end of the 2012, according to Haitong Securities.

Also, Kaisa does not have any immediate funding needs. The next maturity date on its bonds is in 2015. Still, the company did not rule out taking advantage of the right market opportunity, Tam said.

Meanwhile, the developer is expected to perform strongly. In the first half of the year, Kaisa reported 63% year-on-year growth to Rmb12.9bn in contract sales.

“We expect Kaisa’s revenue to continue to achieve double-digit growth in the next 12–18 months, following a period of strong contract sales performance,” Moody’s said in August after the company reported first-half results.

The agency cautioned that Kaisa’s expansion plans, however, could affect its ratings. The developer bought about Rmb8.7bn of land in the first half of this year, well above the Rmb5.8bn spent in all of the 2012 fiscal year.

“Kaisa’s increased appetite for land acquisitions and debt-funded expansion could constrain its ratings in the near-term,” Moody’s said.

To see the digital version of this report, please click here.

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