PRC property developer Evergrande Real Estate Group made history last week with a Rmb9.25bn (US$1.4bn) synthetic renminbi bond - the biggest to date in the fast-growing market.

With Sinochem (Hong Kong) raising Rmb3.5bn from an offshore renminbi deal earlier in the week and a handful of other PRC issuers lining up, Evergrande's deal is yet further evidence of the international markets' enthusiasm for renminbi exposure.

Evergrande's synthetic dual-tranche transaction stood out from the pack. It was the largest offering under the format and the biggest high-yield international bond on record from a Chinese property company.

It was not all good news, however, as both tranches of bonds traded under water immediately, falling to 99.25 after pricing at par on January 13.

The hefty slide in secondary was especially surprising as joint leads Bank of America Merrill Lynch (sole global coordinator), BOC International, Citigroup and Deutsche Bank had built up an order book of a whopping Rmb33.1bn. A total of 136 investors placed orders for the Rmb5.55bn three-year tranche and 108 accounts joined the Rmb3.7bn five-year piece.

A banker at one of the leads cited the reluctance of investors to come into a new product as the reason for the underperformance. He claimed the paper recovered the next day.

Rivals, however, suggested that investors ended up with more bonds than they had expected. Earlier synthetic renminbi deals had also boasted bumper order books, which pushed investors to inflate their orders so as to ensure an allocation.

Others commented that the leads should have left more on the table, given the unexpectedly large size. The transaction priced at 7.5% on the three-year tranche and 9.25% on the five-year, right at final guidance.

Only a week earlier, China SCE Property raised Rmb2bn through a similar synthetic renminbi five-year deal at 10.5%. China SCE has B1/B2 ratings from Moody's/S&P, while Evergrande is at B1/BB.

Synthetic bonds are denominated in renminbi, but settle in US dollars, allowing international investors to book exposure to the Chinese currency.

Evergrande, no doubt, is a much bigger company than China SCE Property, but it may have been too greedy in pushing for such a big size. Evergrande has a history of stretching boundaries: it was the only high-yield issuer from Asia to raise money in the dollar bond markets in the first quarter of 2010. In January last year, it raised US$750m through a five-year Global - the largest international bond from a Chinese real estate borrower - at a coupon of 13%. That deal, too, foundered in the aftermarket.

Not helping Evergrande's synthetic last week was a drop in its outstanding US dollar bonds. As news emerged of the synthetic renminbi bond, the outstanding US dollar paper plummeted as much as five points to 107 after having traded as high as 111/112 earlier in the month.

Moody's put Evergrande's B1 rating on negative outlook on January 12, citing higher gearing and increased indebtedness as concerns as the company looks to fund its fast expansion plans. Evergrande's bonds are rated one notch lower at B2/BB-.

Meanwhile, Nomura Research estimated Evergrande's new paper would have an equivalent yield of about 11.8% if priced as a straight US dollar bond - without the renminbi exposure.

That made Evergrande's deal look aggressive, relative to another PRC property firm, Hopson Development, which priced a far smaller US$300m five-year non-call three straight US dollar bond at 11.75% last Friday (January 14). Hopson is rated B1/BB- by Moody's/S&P, while the bonds are rated B2/B+.

Evergrande's deal was received well in primary with Asian investors taking 86% of the three-year and 80% of the five-year portion, the remainder going to European and offshore US accounts.

In terms of investor type, funds grabbed 36%, private banks and others 52%, and banks 12% of the three-year piece. Meanwhile, funds got 40%, private banks and others 48%, and banks 12% of the five-year piece.

KEEPING IT SIMPLE

Meanwhile, Sinochem kept it relatively simple with its Rmb3.5bn three-year renminbi debut in Hong Kong coming via Citic Securities and Deutsche Bank (sole co-ordinator).

Sinochem's Reg S transaction was well received, with an order book of Rmb9bn leading to an increase from the Rmb3bn initial size. The deal priced at 1.8%, much lower than China Resources Power's Rmb2bn three-year renminbi bond at 2.8% in November and was quoted in the secondary markets last week at 2.2%.

Around 84% of the allotments went to Asia. US investors accounted for 10% and Europe the balance. In terms of investor type, fund managers took 47%, banks 42%, hedge funds 7% and retail investors 4%.

Sinochem (Hong Kong), rated Baa1/BBB+ (Moody's/S&P), will provide a guarantee to Sinochem Offshore Capital, the issuing entity.

Fitch assigned BBB+/stable ratings to Sinochem (Hong Kong) as the new offshore renminbi bonds opens a new low-cost funding alternative for its ultimate parent, as well as for other Chinese state-owned companies.

Having access to the offshore renminbi bond market improves Sinochem Group's liquidity and funding structure. Sinochem HK's cost of funding was lower in the offshore renminbi bond market than onshore borrowings for the same duration, said Ying Wang, a director in Fitch's Asia-Pacific corporates team.

While most of the offshore renminbi bond issuers so far need to repatriate the proceeds to fund their onshore operations, Fitch believes Sinochem HK is likely to keep a majority of its proceeds offshore to support the growing trend of renminbi trade settlement.

Merrill Lynch Citigroup China Bank of america