China Evergrande’s US$6.6b bond rattles markets, prompts round of head-scratching
China Evergrande’s giant US$6.6b bond sale last week is seen by analysts as a cash raising exercise intended to cushion against credit tightening
China Evergrande Group has come under the spotlight after it issued a US$6.6 billion bond last week, the largest US dollar bond ever completed in Asia, even as the debt-laden property giant has vowed to deleverage.
Evergrande, the country’s largest, yet most indebted developer with a debt-equity ratio over 400 per cent, in March pledged to start deleveraging and has since repaid 70 per cent of its outstanding high-interest perpetual bonds.
Analysts said the fund raising could be a pre-emptive move to shore its resources amid the credit tightening.
“As credit gets increasingly squeezed domestically, the company wants to accumulate enough cash on hand in advance,” said Danielle Wang, a property analyst at DBS Vickers.
Of the US$6.62 billion bond offering, US$2.82 billion was for debt exchange, and US$3.8 billion was three-tranche new money raised at a coupon rate of 6.25 per cent, 7.5 per cent and 8.75 per cent respectively.
In a statement, Evergrande said it intended to use the new money to refinance existing debt of the company and for general corporate purposes.
Wang said Evergrande planed to use the newly raised funds to retire perpetual bonds and other high-interest borrowings on the mainland.
Including the US$2.5 billion note Evergrande completed in March, the firm has issued more than US$9 billion of offshore dollar bonds this year.
Franco Leung, a senior credit officer at Moody’s said the developer’s gearing could still improve given the US$9 billion in debt is much less than its US$14 billion in perpetual bonds, which was on track to be cleared up by the end of first half.
“Yet the deleveraging extent will be slower than expected, and it could be negative from our view if the company issues debt again this year,” Leung said.
The global rating agency revised its outlook for Evergrande to stable from negative this month.
DBS’s Chen said Evergrande’s average borrowing costs could rise slightly by the end of the year which would weigh on its 2017 profit.
Meanwhile, the larger than expected size of the bond has shaken up the region’s bond markets.
Some investors who oversubscribed to the offer were surprised by its large size, receiving more than they had expected.
“Many buyers were over allocated at the end, and got [forced] to sell off,” said Tony Chen, a credit analyst at Nomura Holdings in Hong Kong.
All three new Evergrande securities slumped to about 95 per cent of face value on their first day of trading on Thursday last week, implying a paper loss of more than US$250 million for bondholders, the Financial Times has reported.
The bonds have recovered in recent trading days, with its US$4.68 billion notes maturing in 2025 trading at 98.65 per cent of par today.
Chen said Evergrande’s oversized issuance was adding pressure to other Chinese real estate companies, especially those with poor credit ratings, who had plans to issue dollar bonds.