Oxley's recently-launched USD bonds a compelling HY USD opportunity
Oxley Holdings recently launched its maiden 4-year USD bond issue (OHLSP 6.375% 21Apr2021 Corp (USD)). While the bonds have performed reasonably well, gaining ~0.5% since launch (the bonds are currently offered at 100.6 interbank, offering a YTM of 6.2%), the high prevailing yield means the OHLSP 6.375% 21Apr2021 Corp (USD)s still offer a rather compelling high yield credit opportunity within the USD bond segment. In this update, we offer 3 reasons why we think the OHLSP 6.375% 21Apr2021 Corp (USD)s are a "buy" at this juncture.
1. More geographically diversified compared to peers
As we guided in Oxley Holdings: Announces 4Y USD Bonds at 6.5% Indicative Yield, Oxley Holdings has probably priced its USD bond issue against peers in the China real estate space, including the likes of China South City, Fantasia Holdings Group Ltd and Guorui Properties - these are companies which have a similar market capitalisation and operate in the real estate segment.
However, the key difference for Oxley Holdings is its geographically-diversified asset base - its development assets cover the UK, Cambodia, Malaysia, China, Ireland and Indonesia, while the company also has an investment portfolio of completed developments and assets in Singapore, Japan, Malaysia and Cambodia. The company also owns stakes in listed real estate firms Pindan Group and Galliard Group, providing exposure to both completed and development-stage assets in the Australian and UK markets respectively.
Given that the opportunity set for higher-yielding Asian USD debt tends to encompass a fairly sizable amount of China real estate developer credit (at the time of writing, 39% of the Barclays USD Asia HY index was made up of China real estate debt), this has typically presented buyers of higher-yielding real estate bonds with significant geographical concentration risks (specific to the China real estate market). In the case of the Oxley Holdings' OHLSP 6.375% 21Apr2021 Corp (USD)s, the geographically-diversified nature of the firm's real estate investments and projects means the bonds can provide strong geographical diversification benefits without compromising on yield.
2. Credit metrics to improve
As we've noted previously, the OHLSP 6.375% 21Apr2021 Corp (USD)s have been priced against peers in the China real estate market - pricing for Oxley's bonds suggests that market participants view the company as having a credit rating in the B- to B+ range, which is typical for the more levered real estate development firms. As we've guided in Oxley Holdings Ltd: High Yield Retail Bond Opportunity? [23 Sep 16], investors may want to look beyond the prevailing gearing levels (177.8% net debt-to-equity, 53.55% total debt-to-total assets as of end-Dec 16) in recognition of the strong earnings visibility for Oxley Holdings - the majority of existing developments have been sold, with the company reporting S$2.6b of unbilled contracts (as of end-Dec 16), which should help reduce the company's leverage ratios over time.
Also, in mitigation of refinancing or liquidity risks, we note that Oxley tends to keep a sizable level of cash and equivalents (S$462m as of end-Dec 16), which can serve as a buffer to help the company tide over periods where credit conditions deteriorate which may limit the company's access to capital markets. Supplementing that are the company's unleveraged real estate assets including the Akasaka residential assets in Japan, landbank in Malaysia and Cambodia, as well as the equity stakes in Galliard Group and Pindan Group, all of which could be tapped upon to provide additional secured financing should the need arise.
3. Good relative value
While we've previously highlighted the OHLSP 5.000% 05Nov2019 Corp (SGD) - Retail bonds as our "top SGD retail bond pick", the prevailing pricing of the newly-launched OHLSP 6.375% 21Apr2021 Corp (USD)s provides a strong relative value case for the firm's USD bonds. At prevailing pricing, the OHLSP 6.375% 21Apr2021 Corp (USD)s currently trade at 6.2% YTM, a spread of 457bps over US risk free rates. In comparison, Oxley's SGD bonds (both the OHLSP 5.000% 05Nov2019 Corp (SGD) - Retail bonds and the OHLSP 5.150% 18May2020 Corp (SGD) - Retail bonds) are currently quoted at spreads of 380-390bps over SGS, suggesting that the OHLSP 6.375% 21Apr2021 Corp (USD)s offer a yield pick-up of around 70-80bps over the SGD bonds, notwithstanding the currency difference.
The currency difference also means that the SGD-implied yield for the OHLSP 6.375% 21Apr2021 Corp (USD) is in excess of 7% (given that currency forwards allow for a 80bps yield benefit for swapping USD to SGD), although it is also the different nature of investors driving pricing for the USD bonds and SGD bonds that has resulted in the observable pricing discrepancy (SGD investors are likely to be based in Singapore and are more familiar with Oxley, given its SGX listing and namesake real estate assets in the country, while USD investors may lack familiarity with the company, and may not look beyond the prevailing credit metrics vis-à-vis other Asian real estate peers).
Given our familiarity with Oxley Holdings and our understanding of where the company's development assets are in terms of the development lifecycle, we view the OHLSP 6.375% 21Apr2021 Corp (USD)s as an attractive credit opportunity at this juncture, offering investors a sizable 6.2% YTM, which appears generous for the company's credit profile on a forward-looking basis, for a near 4 year remaining tenor.
Declaration:
For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) has a principal position in OHLSP 5.000% 05Nov2019 Corp (SGD) – Retail, OHLSP 5.150% 18May2020 Corp (SGD) - Retail, and OHLSP 6.375% 21Apr2021 Corp (USD). The analyst who produced this report holds a NIL position in the abovementioned securities.
