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Bank of Communications raised a $1.2 billion 10-year bond note on Wednesday, the first major Chinese bank to issue a Basel III-compliant Tier 2 note from its head office.
The Reg S offering — callable in year five — priced at Treasuries plus 285bp, which is 5bp tighter than its initial price guidance, according to a source familiar with the matter. Its yield is 4.628% and coupon is 4.5%.
As a Basel III-compliant bond with loss absorption features — triggers where investors could lose all their money if regulators decide the bank cannot survive — BoCom’s Tier 2 bonds will be rated BBB+ by Fitch, which is one to two notches below the bank’s senior unsecured ratings of A2/A-/A.
Under the terms of the deal, full and permanent cancellation will occur if the China Banking Regulatory Commission deems the issuer non-viable or if a public sector capital injection is necessary, without which the bank would become non-viable.
“We are not entirely comfortable with the process that would lead to a write-off and the assumption that proactive government support that will protect investors in these instruments is a given,” said a Singapore-based credit analyst.
BoCom’s bond will pay a fixed coupon for the first five-years and if not called, it will reset at the prevailing five-year US Treasury rate plus a spread of 285bp for its remaining five years, a source said.
The market has been anticipating Basel III-compliant Tier 2 issuance from Chinese banks for a while now, especially given the fact that many of the country’s financial institutions seek to shore up cheaper forms of funding.
The mainland’s top five banks have obtained approvals last year to issue a combined Rmb270 billion ($43.5 billion) worth of Basel III-compliant bonds from 2014 to 2016. The financial institutions are Agricultural Bank of China, Bank of China, BoCom, China Construction Bank and Industrial and Commercial Bank of China.
In China, banks have been busy tapping markets to raise funds to boost capital buffers as asset quality weakens, although their reported capital metrics do not cause alarm yet.
The country’s top lender, ICBC, in August issued a Rmb200 billion of Basel III-compliant bond — the largest offering for such securities in the local market. As of August 8, ICBC had a common equity Tier 1 ratio of 10.88%, the second-highest level among China’s five largest banks by assets.
In the first half of 2014, BoCom posted Basel III Tier 1 and Core Tier 1 ratios of 10.7%, but the bank’s impaired loan ratio increased to 1.13% from 1.05% in 2013.
“While the banks may well face pressures on profitability and potentially on capital, we do not expect them to suffer losses on a scale that would threaten their solvency,” said a credit analyst. “However, we fully recognise that any prediction about China’s medium-to-long term prospects contains many uncertainties.”
The IMF has, for example, a 7.4% growth forecast for China for 2014, slightly below the government’s official target of around 7.5%.
Comparables
The nearest comparables for BoCom’s new offering were China Construction Bank Asia, Citic Bank International and ICBC Asia’s outstanding Basel III-compliant Tier 2 notes expiring in August 2024, May 2024 and October 2023 respectively, which were trading at G-spreads of 265bp, 320bp and 270bp prior to announcement, according to sources close to the transaction.
While some believe the bond ended up pricing above fair value (around Treasuries plus 275bp), some bond traders suggest giving this deal a miss.
That’s especially the case with China’s Golden Week — which begins October 1 — holidays looming, which could prompt investors to de-risk towards the end of this week post-heavy supply. This potentially gives investors the opportunity to participate in such deals at slightly cheaper levels, said a credit analyst.
BoCom is China’s fifth largest bank, with total assets of Rmb5.9 trillion ($950 billion) and a domestic market share of around 4% in loans and deposits. The bank was established in 1908 and it is now listed in both Hong Kong (since 2005) and Shanghai (since 2007) with a market capitalisation of HK$410 billion ($53 billion).
The bank’s largest shareholder is China’s Ministry of Finance, with a 26.5% stake, closely followed by HSBC with a 18.7% stake.
BoCom Hong Kong, Citi, HSBC, JP Morgan are the joint global coordinators and bookrunners of the transaction. Other bookrunners include BNP Paribas, Credit Suisse, Deutsche Bank and BoCom International.
