ICBC launched a pioneering triple-currency $5.7 billion additional tier-1 perpetual offering on Wednesday, the second preference share offering by a Chinese financial institution in just over a month.
The Basel III-compliant instrument — an upgrade on Bank of China’s preference share issuance on October 16 — was made up of three parts: a $2.95 billion note, a Rmb12 billion ($2 billion) offering and a €600 million ($744 million) tranche.
The huge $28 billion total orderbook size from over 450 accounts allowed ICBC to press down pricing aggressively on all tranches. Both the US dollar and renminbi notes — callable in year five — priced at 6%, while the euro offering — callable in year seven — also priced at 6%, according to a term sheet seen by FinanceAsia.
The initial price guidance area for all three tranches were around 6% to 6.25%.
"The pricing doesn't make sense for some [investors], but how often does a Chinese quasi-sovereign name like ICBC come to the market?," said a source close to the deal. "It’s good for diversification and good for gaining exposure to the biggest bank in China."
ICBC's inaugural offshore AT1 instrument — the first of its kind globally with three currencies — was substantially oversubscribed after its global roadshow, which took place in Asia, the US and Europe from November 26, sources familiar with the matter said.
ICBC’s preference share offering also had the benefit of learning from BOC’s previous technical mishap.
Unlike BOC, whose AT1s were denominated in renminbi but settled in US dollars, ICBC’s notes are denominated and issued in their respective currencies. The paper will also be governed under Chinese law, sources familiar with the matter said.
ICBC, China’s largest lender by market capitalisation, is one of many Chinese banks looking to replenish their capital bases to meet tougher regulatory requirements for capital ratios.
Banks are also coming under pressure as Chinese economic growth slows and bad debt accumulates. Non-performing loans at Chinese banks jumped by the most since 2005 in the third quarter to Rmb766.9 billion, official statistics released early-November showed.
ICBC's latest triple issuance is part of its plan to raise up to Rmb80 billion in preference shares, onshore and offshore.
Comparables
BOC’s outstanding AT1s were used as a yardstick for ICBC’s dollar offering and traded at 102.375 for a yield of 6.167% prior to the deal's announcement, according to sources familiar with the matter.
Credit analysts said it was tougher to gauge the right pricing level for the euro tranche because no existing Chinese bank bonds could serve as a reference point.
European financial institutions’ AT1 instruments callable in 2021-22 were nonetheless used as comparables, including HSBC’s which yielded around 5.25% and Société Générale’s which yielded approximately 6.75%.
“Current China AT1 valuations are inside our bull-case valuation range of 6%-7% yield-to-call, a scenario in which investors have a more favourable view of the Chinese banks,” Desmond Lee, bank credit analyst at Morgan Stanley, said. “These investors would probably also factor in government support even for the AT1 securities.”
The following shows where ICBC's AT1 bonds would come relative to its fellow peers.
Structure
The US dollar and renminbi tranches will have a dividend reset on the fifth anniversary to reflect the prevailing five-year Treasury yield plus a fixed 438.2bp spread, and every five years thereafter. The euro tranche will have the first reset on the seventh anniversary to reflect the prevailing five-year euro mid-swap plus a 537bp spread, and every five years thereafter.
The dividends can be cancelled at the discretion of the bank on a non-cumulative basis subject to shareholder approval. The issue also features a dividend stopper, where ICBC will not pay a coupon on another security or class of securities if it does not pay a dividend on this AT1 instrument.
“[A dividend stopper] is a material credit-positive feature for AT1 investors considering how much equity dividends the banks pay out, and the government ownership of the banks,” Lee said. “We note that this is a unique feature as compared to AT1s issued by the European banks which do not carry dividend stoppers.”
In terms of conversion conditions, the paper will be converted in whole or in part to ICBC's H-shares when the issuer's common equity tier-1 ratio drops below 5.125% or upon a non-viability event.
A non-viability event could occur when the supervisory authority decides that a conversion is necessary or if any relevant authorities decide that a public sector injection of capital is necessary without which the bank will become non-viable, according to ICBC’s prospectus.
In secondary markets, the dollar tranche has traded up to a cash price of 101.625 shorly after being priced, while the euro and renminbi offerings have also traded up to 102 and 100.75 respectively, according to Bloomberg bond data.
