Rights deals help cut borrowing costs for China developers
Country Garden and Yuexiu offerings pave the way for further rights issues by mainland firms
If you are a mainland property developer, a rights offering is a costly and time consuming way of funding that is rarely considered, unless you are in dire straits.
Country Garden was the first Hong Kong-listed mainland developer to offer a rights issue this year and was followed by rival Yuexiu Property last week.
There is little compelling reason why the two property firms offered discounts to the rights shares, besides concerns over their ability to weather a downturn in the sector.
To be fair, the rights shares offered by the mainland duo to mollify investors were less than a US$460 million offering by Hong Kong billionaire Vincent Lo's Shui On Land last year that was at a steep 38 per cent discount.
But the level of discount is certainly an indication of investors' confidence in the company.
Obtaining a comprehensive picture of why the mainland property firms decided to opt for a rights issue instead of tapping the robust bond market is not possible, but the chief financial officer of Country Garden said that the rights issue could lower the company's borrowing costs ahead of the official end of the Fed's quantitative easing.
The Country Garden executive said the rights issue could save billions of yuan in interest payments, which should be a lucrative template for industry peers to follow.
This should have subtly reinforced a market view that the interest rate hike will likely come soon after the Fed halts the long-running bond buying programme that has distorted the fair price of all asset classes globally.
A bullish stock market offers firepower for property firms. In late August, the S&P breached the 2,000 barrier for the first time and the Hang Seng managed to stay above the 25,000-point mark, enabling listed companies to raise equity capital even after a number of worrying macro signals from the US and China.
Who may be the next property firms to raise capital in a rights offering? Theoretically, Evergrande Real Estate Group, a Guangzhou-based developer controlled by Hui Kayan, has the highest potential since his Hong Kong-listed firm has accumulated 350 billion yuan (HK$441 billion) in liabilities - a stunning debt level.
