China Construction Bank sold mainland China’s first global bank capital offering since November on Wednesday evening in Asia, a $2 billion 10-year tier-2 bond callable in year five.
Rated BBB+ by both Standard & Poor’s and Fitch, the Basel III-compliant note priced at US Treasuries plus 242.5 basis points, which is 12.5bp tighter than its initial price guidance area, according to a term sheet seen by FinanceAsia.
The debt sale follows CCB’s investment roadshow, which began on April 29 in Hong Kong, Singapore and London. Order books were in excess of $7 billion from over 250 accounts, said a source close to the deal.
Just like other Chinese financial institutions that have raised Basel III-compliant notes — so-called new-style paper — CCB intends to use the proceeds from its latest Reg S-only offering to boost its tier-2 capital in order to meet upcoming Basel III bank capital requirements.
Regulators around Asia have proposed a tighter bank capital regime to comply with an international agreement drawn up by the Basel Committee on Banking Supervision, an international group of standard setters. China began to enforce Basel III standards on January 1, 2013.
The measures, adopted after the 2008 global financial crisis, are meant to make banks less vulnerable in future emergencies. They call for banks to maintain a buffer of loss-absorbing capital that is equal to at least 7% of their risk-weighted assets.
The amount required is quite substantial for Chinese financial institutions, credit analysts said. Those rated by Moody’s, for example, have an estimated Rmb650 billion ($105 billion)-worth of Basel II — or old-style — tier-2 debt maturing by 2021, which will be refinanced mostly by domestic markets.
China’s top-five banks have obtained approvals from regulators to issue a combined Rmb270 billion worth of Basel III-compliant bonds from 2014 to 2016. The banks are Agricultural Bank of China, Bank of China, Bank of Communications, CCB, and Industrial and Commercial Bank of China.
There has been $10.7 billion-worth of dollar-, euro- and yen-denominated tier-2 issuance so far this year from banks in Asia ex-Japan, significantly more than last year's $869 million during the same period, according to Dealogic data.
The last Chinese issuer to raise a Basel III-compliant tier-2 offering was BOC, which sold a $3 billion offshore tier-2 deal last November that attracted an order book of $18 billion. CCB is also the first Asian issuer to raise a tier-2 bank capital note this year.
Standard structure
In the event of a default, CCB’s subordinated instrument ranks higher than equity and additional tier-1 capital and hybrid instruments of the bank. Holders of the debt, though, would rank lower than the financial institution’s depositors and general creditors.
The bonds include a non-viability trigger — where investors could lose all their money if regulators decide a bank cannot survive. If a non-viability event occurs, the principal amount and any unpaid interest of the bonds would permanently be written off in full.
A non-viability event occurs when the China Banking Regulatory Commission (CBRC) decides a write-off is necessary or a relevant authority decides a public sector injection of capital or equivalent support is necessary to maintain the bank's viability. Once the bonds have been written off, they will be permanently cancelled and cannot be restored or become payable again under any circumstances.
As a result, Fitch rates the bond two notches below CCB's A rating to reflect its “high loss severity” relative to senior unsecured instruments.
In the case of CCB’s tier-2 bond, a full write-off occurs when the institution’s existing tier-1 instruments are converted into equity or their principal amounts and accrued unpaid amounts are converted, cancelled, or reduced. The same full write-off could occur if the same scenario happens for tier-2 securities too.
Comparables
The nearest comparables for CCB new bonds include its outstanding senior securities maturing in July 2019, which traded at a G-spread of 130bp, according to one Hong Kong-based credit analyst, who declined to be named.
CCB's Hong Kong subsidiary, Baa1/A- rated CCB Asia, also has tier-2 notes expiring in August 2024, which traded at a G-spread plus 230bp, he said.
Other comparables include BBB+ rated Bank of Communications and Ba1/BBB- rated Bank of East Asia's outstanding tier-2 2024 bonds, which traded at G-spreads of 240bp and 260bp, respectively.
"In our view, [the deal] looks attractive compared to CCB's senior paper, not to mention versus CCB Asia's tier-2, BOCOM's tier-2 and comparable to Hong Kong local bank tier-2 deals," the credit analyst said.
"That’s especially the case given our long-held view that China’s big four banks are among the most systemically-important [state-owned enterprises] anywhere in the world given their key policy role, which in turn translates into a negligible write-down risk," the analyst added.
For CCB’s offering, a fixed-rate coupon of 3.875% will be paid semi-annually until year five after which it resets to the prevailing five-year US Treasury rate plus a spread of 242.5bp, according to the term sheet.
CCB has options to redeem the bonds in full in 2020 and at any time upon obtaining the consent of the CBRC if any change in the Chinese regulator’s capital regulations result in the bonds no longer qualifying as tier-2 bank capital.
Asian investors subscribed to 88% of the notes, followed by Europe 11% and US 1%. Fund managers bought 39% of the paper, followed by financial institutions 25%, insurance and pension funds 13%, sovereign wealth funds 12% and private banks 11%.
CCB is China’s second-largest bank after ICBC, with total assets of Rmb16.7 trillion ($2.7 trillion) and a domestic market share of approximately 12%. Established in 1954, it is now listed in both Hong Kong (2005) and Shanghai (2007) with a market capitalisation of HK$1.9 trillion ($246 billion).
The bank’s controlling shareholder is the Chinese government’s Central Huijin Investment, which holds a 57.3% stake in the institution.
CCB International, Citi, HSBC and Standard Chartered are joint global coordinators and book runners on the transaction. Other book runners include ANZ, Credit Suisse, Deutsche Bank and JP Morgan.
An earlier version of this item stated the incorrect year in the headline. It has been changed from 2014 to 2015.
