What's Happening?
SGX-listed Oxley Holdings Ltd (S$1.71b market capitalisation, as of 12 April 2017) has just announced a new 4-year tenor USD-denominated senior unsecured bond, with initial price guidance at 6.5%. We offer some quick comments on the new issue and on pricing.
Our comments
Having previously offered some quick thoughts on a potential USD-denominated issue from Oxley Holdings (Oxley Holdings: Takeaways from Fixed Income Investor Meeting), we are slightly embarrassed to have suggested pricing "in excess of 5.5%" for a potential new issue - this is quite far from the initial price guidance of 6.5%! Nevertheless, as we highlighted in that same piece, we noted that pricing considerations can be very different in the USD-denominated bond market vis-à-vis the SGD bond market, and the significant yield premium offered on Oxley's maiden USD-denominated bond issue is a testament to this.
At 6.5% indicative on a new 4Y USD issue, this represents a 482bps spread over the 4Y US risk-free or 467bps over 4Y mid-swaps, which is a sizable premium versus the approximate 350bps spread on the SGD-denominated OHLSP 5.000% 05Nov2019 Corp (SGD) - Retail bonds. Of course, buyers of Oxley's SGD-denominated bonds and its new USD bonds are likely to be very different - pricing on the former is driven by nuances in the SGD credit market as well as retail investor sentiment, while pricing on the latter is likely to be driven by relative value considerations (which are more critical for institutional bond buyers).
It is therefore instructive to look at possible peer comparables in the Asian real estate space. Based on the indicative yield of 6.5%, Oxley is possibly looking towards similarly-sized China-centric real estate peers like China South City (CSCHCN 6.750% 13Sep2021 Corp (USD) at 6.5% YTW), Fantasia Holdings Group Ltd (FTHDGR 7.375% 04Oct2021 Corp (USD) at 6.6% YTW), and Guorui Properties (GUOPRO 7.000% 21Mar2020 Corp (USD) at 6.3% YTW) - based on the credit ratings of such peers, this implies a credit rating of in the B- to B+ range for Oxley, which is not surprising given its sizable gearing (177.8% net debt-to-equity, 53.55% total debt-to-total assets as of end-Dec 16).
Nevertheless, we note that Oxley is significantly more diversified geographically compared to these similarly-sized China-based real estate firms (and whose bonds are currently quoted at similar yield levels), while the company has also locked in a sizable amount of contracted sales which will provide a decent level of earnings visibility going forward (a significant proportion of properties under development have already been sold). As has been our view for some time (see Oxley Holdings Ltd: High Yield Retail Bond Opportunity? [23 Sep 16]), we think investors should be cognisant of the firm's sizable level of assets which are still in the development stage (where revenue and profits have yet to be booked) and should be looking beyond the current high leverage ratios which are less representative of the firm's financial health.
We continue to favour Oxley's bonds (which still offer some of the highest yields amongst mid-sized real estate developers in the SGD-denominated bond market) and think that rather generous indicative pricing on the company's new USD-denominated bonds make for a rather compelling investment opportunity in the USD HY bond market at this juncture. Consequently, we think that investors should subscribe for the firm's new 4Y USD bonds - note that final pricing is likely to tighten from the 6.5% initial guidance, although the significant spread premium offered (based on the initial price guidance) means there is plenty of room to do so without detracting from the investment merits.
