China Builder Plans Rare Floating-Rate Bond in Shaky Market

(Bloomberg) -- China Vanke Co., the nation’s largest listed developer by market value, may price a floating-rate bond on Thursday amid rising funding costs spurred by the rush of issuance from the sector.

Vanke is marketing a five-year floating-rate note at 155 basis points over three-month Libor, according to a person familiar with the matter. This could be the first Chinese developer to sell a dollar-denominated FRN through the public syndicated bond market, according to Bloomberg-compiled data. Vanke’s investor relationship department didn’t immediately reply to a text message seeking comments on the deal.

Sales of these type of bonds by non-financial issuers are rare as borrowers are exposed to swings in interest rates with the coupon based on Libor. Yet they may form attractive investments for buyers looking to hedge against a backdrop of rate increases.

“Many investors have little appetite to add duration but have mounting need to deploy cash, so floating rate notes could be one option," said Jimond Wong, a senior portfolio manager at Manulife Asset Management.

Chinese builders, faced with a wall of debt maturities, have flooded the dollar-bond market with new issuance. That’s spurred increases in borrowing costs, as investors lose appetite for debt from the sector. The nation’s developers have sold $22.3 billion of dollar bonds so far this year, a 96 percent jump from the same period a year earlier. Average yields on Asian junk debt were at 6.90 percent on Thursday, near the highest level since March 2016, a Bloomberg Barclays index show.

Property developer China Overseas Grand Oceans Group postponed its fixed-rate, five-year bond offering that was expected to price on Wednesday due to unfavorable market conditions, people familiar with the matter said.

More To Come

A mix of investment grade and high-yield Chinese real estate companies are in talks with banks for potential issuance of floating rate bonds, according to debt capital market bankers familiar with the matter. Over the past year, builders have resorted to innovative funding methods in the dollar bond market amid a jump in onshore borrowing costs, resulting from the government’s deleveraging campaign. That includes sales of dollar bonds with tenors of one year or less as these don’t require regulatory approval.

"While floating-rate notes may not be the preferred option, if companies need the capital, it might be the only real viable option in this volatile market," said Todd Schubert, head of fixed-income research at Bank of Singapore. Floating-rate note issuance by companies reflects their challenge to place deals at levels they consider acceptable or even at all, he said.

Haitong International Securities Group Ltd. said it is advising property developers against issuing floating rate bonds as it’s difficult to estimate how much further the Libor would rise, said Chen Yi, the firm’s Hong Kong-based head of debt capital markets. "To those who have no urgent refinancing needs, I’d suggest them to wait on the sidelines for a bit," he said.

©2018 Bloomberg L.P.