Huishang AT1 heralds ‘second wave’ of China supply

Since Bank of China opened the market for dollar additional tier one (AT1) bonds from Chinese issuers in October 2014, there have been $20.3 billion of deals. But until this September, only China’s biggest banks had come to the market.

Their dominance is now being challenged. China Cinda Asset Management raised $3.2 billion on September 23. China Citic Bank sold a $500 million deal less than a week later. And most recently, Huisang Bank turned to investors with a $888 million deal on Thursday.

Huishang Bank was little known to credit investors, having never before issued a bond offshore. But after approaching investors with a juicy premium over its bigger rivals, it got more than enough demand to hit its $888 million funding target.

That is a good news for a handful of other mid-tier Chinese banks that are planning to sell dollar AT1s. China Minsheng Bank, for instance, wants to raise around Rmb10 billion ($1.47 billion) from the market, according to a banker. China Zheshang Bank said in August that it would raise as much as Rmb15 billion.

These deals were mooted months ago. But after Huishang’s deal this week, it may not be long before executives at these banks — and others — decide the time is right to come to market.

Discovery channel

The pricing of Huishang’s deal relied in part on “price discovery”, according to one banker. In other words: the existing comparables were not close enough for bankers and investors to agree on certain basic fair value assumptions, making roadshow meetings all the more valuable.

After those crucial discussions, the bookrunners approached investors with price guidance of around 5.75% for the perpetual non-call five year deal.

That offered a chunky premium over the 4.08% that China Construction Bank’s AT1 was yielding, or the 4.33% yielded by Bank of Communication. But the price discrepancy was little surprise.

Huishang is not just a smaller bank that those names. It is also unrated, adding another hurdle for an issuer that had never before sold a dollar bond.

In the end, the bond priced at par with a 5.5% coupon. Judging by the secondary performance — slightly down on Friday, but not by much — that is a price level most Asian credit investors see as being fair. 

That is crucial for the ‘second wave’ of additional tier one bonds, as one banker referred to the upcoming issuance.

On again, off again

China’s strict capital controls mean banks listed in Hong Kong are forced to turn offshore for AT1 capital.

These deals are structured to convert into equity if banks breach a certain common equity tier one trigger, which is typically set at 5.125%. But Chinese regulators are not willing to allow the conversion of onshore bonds into equities listed in other jurisdictions, said a senior banker. That makes the dollar bond market the default choice for AT1 fund-raising.

In many Asian countries, that would add significant capital costs to banks. In India, for instance, banks can raise capital much more cheaply in the onshore market. That is not the case in China.

“There never has been a major advantage of raising capital onshore for Chinese banks,” the banker said. “It’s marginal.”

Minsheng Bank offers a good example. The bank is listed in China and Hong Kong. In theory, it could stock to the onshore renminbi market for its capital-raising needs. But instead Minsheng decided to split its funding between the onshore and offshore markets.

Minsheng has already had success raising capital onshore, after selling Rmb20 billion of tier two bonds in August, paying 3.50%. It will soon find out whether it should have stuck to the onshore market — or whether following Huishang’s example is worth the effort.