Two Chinese companies, Zhenro Properties Group and Maoye International Holdings, broke records last month, albeit for the wrong reasons. Zhenro paid a hefty yield of 13.7% for a $280m 12.5% 2.25 year bond — the highest level among Asian dollar issuers so far in 2018. Maoye’s par-priced 13.25% two year non-put one note, priced the same day as Zhenro, came second.
What’s unsettling is that neither deal, despite the returns on offer, was well received by investors. Zhenro managed to scrounge an order book that covered its deal just twice, while retail chain operator Maoye only raised $150m, despite having a $300m 7% bond maturing later this month.
More recently, Cifi Holdings Group Co, a well-liked Chinese property developer that is a frequent debt issuer, paid a handsome 60bp new issue premium to use up its remaining $300m fundraising quota for 2018. Despite price guidance unchanged from the 8.625% area, the deal still suffered from slow bookbuilding, with a modest order book size of just around $425m. In comparison, Cifi’s last issuance, a $500m 6.875% 2021 in April, summoned an over $4.25bn book.
There are other examples too. State-owned Tewoo Group tried to attract accounts to an 8.25% offering, but ended up pulling its $200m-$300m two year trade. That was a big blow considering that the company has issued notes in the low-3% over the past three years. Tewoo has a $500m 3.7% bond due on October 17.
What all this shows is that the bond market has become less and less accommodating. Paying up, which used to reel in a horde of investors, simply isn't enough anymore.
Issuers need to think seriously about whether heading to the offshore market is in their best interests.
Sure, international debt issuance from Chinese credits has gone from strength to strength over the past few years. But issuers need to get away from the follow-the-herd mentality — especially if the hefty funding costs for dollar bonds are simply unsustainable in the longer run.
There is no disputing the fact that tapping the international debt market has its advantages, be it diversification, the cost of issuing in certain cases, or sometimes easier regulatory requirements compared to the domestic market. But rather than pay teeth-grinding premiums on dollar bonds, monitoring the market for the right window and, more importantly, choosing the most suitable funding avenue, are critical for borrowers.
Other channels should not be overlooked, such as private placements and bank loans. The onshore bond market too is still open for the right names, with liquidity deep and pricing potentially attractive.
If market signals are right, debt issuers are likely to face a bumpy ride over the rest of the year. But this provides them with a perfect opportunity to take another look at their fundraising strategies and go back to the basics.