Woori is latest Asia bond success as China property comeback scented

Published 19 January 2023, 04:14 PM

Stellar market conditions for the Korean lender could entice China real estate sector back to market

A public holiday in the US on Monday and the impending Chinese New Year curtailed bond issuance in Asia this week, after a frantic first fortnight of 2023. But what little supply there was exemplified the superlative market on offer for prospective issuers — bankers talked of a "return to glory days" — and even long locked out Chinese property developers could be on the way back.

South Korea's Woori Bank was the only issuer to hit the market with a dollar deal this week and was well rewarded for doing so. It priced a $600m 4.875% five year sustainability bond at 135bp over US Treasuries to yield 4.955%.

“It went exceedingly well,” said Winston Herrera, head of Asia ex-Japan debt syndicate at BNP Paribas, one of the lead managers. “The $8.1bn book was Woori’s largest ever, we tightened aggressively by 40bp during execution for a negative new issue premium of 10bp.”

The 144A/RegS deal, rated A1/A+/—, traded 20bp tighter in the secondary market on Wednesday.

Crédit Agricole, Merrill Lynch International, MUFG Securities, Standard Chartered and Woori Global Markets were also lead managers on the deal.

Proceeds will be used to fund green and social projects under Woori’s green, social and sustainability bond framework.

Woori joins several other recent issuers to have enjoyed huge demand and negative new issue premiums. The Republic of the Philippines built a $25bn book for its triple-tranche deal last week, which came with a negative concession of 5bp across the curve. Airport Authority Hong Kong and Korean steel major Posco both built some of their largest ever order books for recent multi-tranche deals.

“The market is as strong as we’ve ever seen it,” said Herrera. “It’s hard to believe after how difficult last year was, but it feels like we’re back to the glory days of 2020 and 2021. Even then, you might have been able to print with a negative new issue premium, but you wouldn’t see deals then tighten another 20bp.”

Debt bankers expect appetite to be equally strong when supply restarts after the Chinese New Year. “It’s a great market and now that the sovereigns and high-rated names have come you’ll start to see things move down the credit curve,” said one, pointing to the squeeze on concessions. “Last year new issue premiums for Asian dollar bond issuers were around 20bp-25bp. This year it's 5bp-10bp across the curve.”

Wanda sets tongues wagging

Another transaction that characterised both the market's soaring recovery and the potential for lower rated issuers was Dalian Wanda Commercial Management, which began marketing the first Chinese property bond since 2021 late last week.

It ended up pricing a $400m 11% two year bond to yield 12.375% through sole bookrunner Credit Suisse.

“If you had asked people a few months ago whether the first Asia corporate high yield deal would be from the Chinese property sector, the answer would have been a clear and resounding no,” said Henry Loh, head of Asian credit on abrdn's fixed income team.

The result triggered debate across the market about how and when Wanda’s peers in the residential real estate sector might also return to issuing.

On the one hand, Wanda found clear appetite for its new issue. It was increased from $200m to $400m and ended up 3.7 times oversubscribed, according to a banker close to the deal.

However, he also agreed that Wanda holds a particular attraction as a credit because it has a business model largely reliant on rental income from commercial property. “It was a good deal but we’re still at the start of the property sector’s recovery,” he said. “There’s not going to be a flood.”

Bankers away from the transaction expressed a similar qualified optimism. “There will be deals coming from strong names, but we won’t be returning to the days when you had single-B names no-one had ever heard of coming to market,” said one. “The club of potential issuers is limited to the quality names.”

A select few

As to which these issuers might be, the market is looking closely at the Chinese government’s support measures for specific issuers.

These include SOE guarantees for domestic currency bond issuance and easier credit lines from banks. Multiple reports that the government has a “white list” of developers — which are both systemically important and in better shape — have fuelled focus on a select group.

This includes developers like Country Garden, Longfor and Seazen. But even if these issuers could bring deals, whether the pricing on offer would be acceptable is another question.

Wanda, despite its relative strengths, still had to pay up to get its deal away. Moody’s, which rated Wanda’s deal Ba3, noted the company’s “strong brand and track record”, its large cash holdings supporting liquidity and its “sizeable and stable” rental and fee income. Fitch said the Wanda group “continues to demonstrate strong funding access” — something debt bankers away from the transaction said was key for any issuer looking at the offshore market.

The final 12.375% yield, however, was fair relative to secondaries but expensive on an absolute basis, said Leonard Law, a senior analyst at investment research firm Lucror Analytics: “It was very high considering Wanda has a better business profile than most other developers — it's more like an owner of commercial property.”

This, added Law, implied that investors are still risk averse when it comes to high yield real estate names. Debt bankers away from the deal concurred. “There wasn’t really a liquid secondary for comparison but 12% is definitely expensive,” said one.

Chinese property dollar bonds have strengthened in secondary this year, but remain well shy of their 2022 highs. Longfor’s 4.5% 2028 notes started the year at a cash price of 81.7 and were offered at 89.1 this week. Seazen’s 4.5% 2026 bonds started at 67.7 and were offered at 78.4.

For many names, high interest rates are likely to keep them away from the offshore market unless they are compelled to issue, said syndicate bankers. Wanda, for instance, had an upcoming maturity to refinance and found strong reverse enquiry from core investors, according to bankers away from the transaction.

But for riskier names the domestic market offers far more efficient pricing. “A developer able to tap the onshore market in the low to mid single digits isn’t going to come to an offshore market demanding pricing in the mid-teens,” said Loh at abrdn. "This will limit supply in the offshore market until a point where offshore yields normalise, and may potentially be a driver of this normalisation.”

Law at Lucror said international investors’ risk aversion is likely to ease once the property development sector sees a sustained recovery in contracted sales. But Lucror’s projection for contracted sales this year is neutral or mildly positive at best.

The government is stepping up efforts to support the industry, but is also wary of creating moral hazard by bailing out troublesome names. Thus far, support measures have fallen short of stimulating demand to help boost sales.

All this makes assessing the outlook for the sector and specific issuers a complex task, but there are rewards to be had for strategic investors.

“We’re not shying away from the challenge and see opportunities in today’s market,” said Loh. “From a global investor perspective, rebuilding confidence might take more time — if it happens at all — simply because people were badly hurt in that space. We need to wait and see whether confidence returns.”

Fantasia finds common ground

Resolution across some of the property sector’s high profile restructuring cases could also inject confidence into a recalcitrant global investor base.

Fantasia Holdings said, in an announcement on the Hong Kong exchange this week, that it had made progress with major holders of its senior dollar bonds, which total $4.01bn.

Fantasia has reached an agreement in principle on restructuring the dollar bonds and “certain other” offshore debt, signed by holders of approximately 24.5% of the outstanding notes, it said.

“In order for investor sentiment to improve there needs to be progress on debt restructuring across the sector,” said Law at Lucror. “The more companies that reach agreements the more helpful it is in demonstrating the recovery.”

As part of the agreement, the company will convert $1.3bn of interest-bearing debt into ordinary company shares. Creditors will also receive eight series of dollar denominated notes maturing between December 2024 and June 2029. These new bonds will have interest rates ranging between 5% and 8% following initial pay-in-kind periods.

Fantasia’s dollar bonds, most of which are due to mature in the next year, jumped five or six cash points following the news. The group’s 11.875% notes due in June started the week at a cash price of 12.4 and were offered at 18.9 on Thursday.

Fantasia said it had identified certain projects for disposal, and intends to use 40% of the proceeds from those sales as cash sweep for the new notes. The restructuring would extend Fantasia’s debt maturity profile from two to 6.5 years with the earliest maturity at December 2024, the company said.

This would create an “essential” two year period before the next maturity, allowing the company to stabilise and improve its operations, according to the filing. Fantasia also plans to raise new funds for a debt buyback, although this will rely on a successful restructuring.

China Evergrande — patient zero for the property debt crisis — appeared also to be moving towards a restructuring proposal; although it will do so without PwC, its auditor, which Evergrande announced on Monday had resigned.

Evergrande said it was pushing forward with debt restructuring, but had been unable to agree on a “timetable and the scope of work” with PwC.

There were reports this week that the troubled developer will offer investors two options for restructuring. One of these would involve an extension of up to 12 years and conversion into new notes with coupons of only around 2%.

Unlike Fantasia’s more reasonable terms, analysts have found Evergrande’s proposal distinctly unappetising. “That proposal is pretty weak compared to what other developers have done,” said Law. “I think there will be room for creditors to push for more.”

By Steven Gilmore