Dim-Sum Junk Bonds Lure Galaxy Yielding Less Than Wynn, MGM: China Credit

Hong Kong demand for yuan-denominated bonds is so hot that Galaxy Entertainment Group Ltd., a casino operator, was able to sell notes at yields lower than in Shanghai and below those on gaming debt in the U.S.

Galaxy, which is building a 2,200-room complex in Macau with the world’s largest roof-top wave pool, sold 1.38 billion yuan ($207 million) of three-year notes yesterday priced to yield 4.625 percent. The bonds were the first speculative-grade corporate debt offered in Hong Kong’s yuan market, according to Standard & Poor’s. They yield 58 basis points less than similar- maturity investment-grade bonds in Shanghai, and less than half MGM Resorts International’s dollar debt.

“I’d be surprised if there aren’t a lot of high-yield issuers in this market in the first quarter of next year,” Pierre Faddoul, a credit analyst at Aberdeen Asset Management Asia Ltd., said in a phone interview from Singapore. “The yields are attractive and there’s a huge pool of savings waiting to finance this.”

A yield of less than 1 percent on three-year government bonds, coupled with speculation the yuan will appreciate, is driving down borrowing costs for issuers in Hong Kong’s so- called dim sum market. The average yield investors demand to hold yuan debt in the city fell 12 basis points to 2.1 percent in the past month, less than half that on Chinese companies’ dollar-denominated bonds, according to data compiled by Bloomberg and JPMorgan Chase & Co.’s Asia Credit index.

Yuan Appreciation

China’s policy makers, seeking to curb the fastest inflation in two years, may allow the yuan to rise 6.2 percent by the end of 2011, the most among the so-called BRIC nations, according to a Bloomberg survey of economists. Russia’s ruble may gain 4 percent and India’s rupee 5 percent, while Brazil’s real should drop 2 percent, according to their median view.

The yuan fell 0.065 percent to 6.6552 per dollar in Shanghai yesterday, resulting in a loss of 0.1 percent this month. Twelve-month non-deliverable forwards reflect bets for a 2.2 percent advance in the coming year.

Hopewell Highway Infrastructure Ltd. sold the first non- financial dim sum bond in July, issuing 1.38 billion yuan of July 2012 notes priced to yield 2.98 percent, Bloomberg data show. McDonald’s Corp., the world’s largest restaurant chain, became the first foreign non-financial company to sell yuan debt in the city when it offered 200 million yuan of 3 percent notes due 2013 in August, the data show.

New Market

“The fact this market only really started in July and just five or six months later we’re seeing high-yield issuance is reflective of the level of interest in this asset class,” said Aberdeen’s Faddoul. “In some ways it’s easier for Galaxy because through their casinos in Macau and dollar bonds they’re already well-known to investors in greater China, but it definitely reflects positively on the risk appetite,” he said, adding that Aberdeen isn’t buying Galaxy’s yuan bonds.

Galaxy, which is building a $1.9 billion casino resort in Macau, said it will use money from the bonds for non-gambling businesses and general corporate use. Casino revenue in Macau, the world’s biggest gambling hub, rose 57 percent in the first 11 months of this year to 169.5 billion patacas ($21 billion).

“This is opportunistic financing,” Robert Drake, the chief financial officer at Galaxy, said on Dec. 6 after announcing the sale. “There’s a strong demand for renminbi out there and this is just another example of how we use opportunities to increase our financial flexibility,” he said, referring to the yuan’s other name.

U.S. Gaming

MGM Resorts’ $500 million of 10 percent notes due 2016 last yielded 10.05 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Wynn Resorts Ltd.’s $1.32 billion of first-mortgage notes due 2020 were quoted at a 6.39 percent yield, Trace prices show. Both companies are based in Las Vegas.

Wynn Resorts is rated BB by S&P, according to Bloomberg data. Galaxy’s Galaxy Casino SA unit is rated three rungs lower at B, and the parent group would also be speculative-grade if it had a rating, S&P analyst Joe Poon said in a phone interview.

High-yield bonds, also known as speculative-grade or junk debt, are rated below Baa3 by Moody’s Investors Service or lower than BBB- by S&P. A basis point is 0.01 percentage point.

The average yield investors demand to hold the most actively traded three- to five-year investment-grade debt in China’s Shanghai-based interbank bond market is 5.2 percent, according to data compiled by Bloomberg. Dongbei Special Steel Group Co.’s 500 million yuan of securities due 2015, ranked AA by China Lianhe Credit Ratings Co., were last quoted at a yield of 6.66 percent, according to Chinabond prices.

Dollar Notes

Yuzhou Properties Co., a junk-rated Chinese developer, raised $200 million on Dec. 8 from five-year notes priced to yield 14 percent, according to data compiled by Bloomberg. Xiamen-based Yuzhou attracted $350 million of orders for the sale, according to a person familiar with the matter, who asked not to be identified because the details are private.

Galaxy’s sale attracted 14 billion yuan of orders, a person familiar with the deal said yesterday, also asking not to be identified because the details are private.

Yuan bonds offer greater returns than deposits in Hong Kong. HSBC Holdings Plc, which controls two of the city’s three biggest banks, pays 0.71 percent interest on deposits of 500,000 yuan or less placed with it for 12 months. Deposits will almost triple to 400 billion yuan in three years from now, the bank forecast this month.

“We expect to see in the next 12 to 18 months 50 billion renminbi of issuance in Hong Kong,” Sundeep Bhandari, Standard Chartered Plc’s head of global markets in Northeast Asia, said in a phone interview from Hong Kong.

Government Debt

The yield on China’s 2.68 percent government bond due November 2013 rose 1 basis point to 3.2 percent yesterday, Chinabond data show.

The yield on India’s three-year bonds jumped 10 basis points to 7.6 percent while similar-maturity bonds yielded 7.1 percent in Russia and 12.4 percent in Brazil. These nations make up the so-called BRIC group of emerging economies.

One-year interest-rate swaps, or the fixed cost needed to receive the floating seven-day repurchase rate, increased 8 basis points to 3.14 percent yesterday. Five-year swaps climbed 6 to 3.93 percent. That rate is up from this year’s low of 2.68 percent on Aug. 12, Bloomberg data show.

The cost of protecting China’s sovereign bonds from default rose 0.4 basis point yesterday to 71.3, according to CMA prices. The five-year contracts have risen from a two-year low of 52.3 basis points on Oct. 13.

To contact the reporters on this story: Shelley Smith in Hong Kong at ssmith118@bloomberg.net Katrina Nicholas in Singapore at knicholas2@bloomberg.net.

To contact the editor responsible for this story: Will McSheehy at wmcsheehy@bloomberg.net

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