China Vanke Co. (“Vanke”) priced a 5-year U.S. dollar floating rate bond at the end of last week amid volatile markets characterised by rising funding costs resulting from a deluge of supply from the China real estate sector. Chinese developers have been flooding the dollar bond market with new issuance to refinance maturing debt. This has spurred increases in borrowing costs as investors tire of debt from the sector, which has seen dollar issuance of $22.3 billion so far in 2018, a 96% jump from the same period in 2017. Fallout from market fatigue included property developer China Overseas Grand Oceans Group, who postponed a 5-year fixed-rate bond offering that was expected to price mid last week, due to unfavorable market conditions.
Vanke is China’s largest listed developer by market value and is the first developer from the country to sell a dollar-denominated FRN through the public syndicated bond market. The notes, which were priced at Libor+155 bps, are currently trading at a mid of Libor+150 bps. It is rare for non-financial borrowers to consider issuing floating rate notes as they become exposed to interest rate movements when bond coupons are based on Libor instead of being fixed. Nevertheless, in current markets, these are attractive investments for investors looking to hedge against a backdrop of rate increases. In line with this, a mix of investment grade and high-yield Chinese real estate companies are in talks with banks for potential issuance of floating rate bonds.