ICBC’s Macau branch raised a $320 million 10-year Basel II-compliant (or old-style) note on Wednesday, given the fact that the special administrative region has not implemented the new Basel III rules yet.
The Chinese bank’s latest Reg-S offering, which is callable in year five, garnered interest from quality investors that were interested in holding the old-style as the structure does not come with the point of non-viability (PONV) clause — a trigger where investors could lose all their money if regulators decide the financial institution cannot survive.
“Investors appreciated the rarity of this type of structure,” said a source close to the deal, adding that the transaction received a total order book of more than $2.7 billion from more than 130 accounts.
The offering is also the first international bond from a Macau-based financial institution, the source said.
Given the demand, ICBC Macau was able to tighten pricing by 25bp to price at Treasuries plus 225bp, according to a term sheet seen by FinanceAsia.
Recent Basel III-compliant transactions were used as comparables, including ICBC Asia and China Citic Bank’s existing notes that expire in 2023, which were trading at a G-spread of 286bp and 278bp respectively.
After taking into consideration the difference in premium between the old-style and new-style notes of about 26bp, fair value for ICBC Macau’s new issuance would come at about 255bp, sources added.
Korea Exchange Bank was the last Asian financial institution to sell a Basel II-compliant note. Last October, the bank raised a $200 million 10-year old-style subordinated bond, just before the country shifted towards adopting new Basel III rules in December.
Higher preference for Basel III
Asian investors subscribed to 78% of ICBC Macau’s paper, while the rest went to European investors. Fund managers purchased 53% of the notes, followed by insurers 22%, financial institutions 13%, private banks 10% and corporates 2%.
Although ICBC Macau’s bond was eight times oversubscribed, some investors prefer holding Basel III-compliant notes as they offer better value despite the PONV clause.
“That’s based on our strong view that the Chinese government will never allow its major banks — as the most systemically important state-owned enterprises and a crucial component of China’s command economy — to approach the point of non-viability,” said an investor. “So why not hold the higher yielding bonds.”
ICBC Macau's offering has a fixed coupon rate of 3.875% until 2019. Thereafter, it resets to the then prevailing five-year US Treasury yield plus an initial spread.
In secondary markets, the bond is trading at Treasuries plus 220bp, which is a tightening of 5bp, according to Bloomberg data.
ICBC Macau is 89% owned by ICBC and is Macau’s second-largest bank, with total assets of P174 billion ($22 billion) and a market share of 16%-17% in deposits and loans. The bank, formerly known as Seng Heng Bank, was acquired by ICBC in 2007 and subsequently renamed in 2009.
Elsewhere, Haitong International raised a $600 million five-year bond. The Reg-S offering priced at Treasuries plus 255bp, tightening from an initial price guidance of about the high-200bp area, according to a source familiar with the matter.
The note, which is guaranteed by Haitong International Securities Group and has a keepwell from Haitong Securities, received an order book of more than $4.4 billion from more than 240 accounts.
Hong Kong investors subscribed to 45% of the notes, followed by Singaporean investors with 32%, European investors with 11% and others with 12%. Financial institutions purchased 31% of the paper, followed by private banks with 27%, fund managers with 22%, hedge funds with 8% and others with 11%.
Haitong International and Deutsche Bank were the joint global coordinators and bookrunners of Haitong’s bond. KGI Asia was the other bookrunner.
ICBC Macau, ICBC International, HSBC and Standard Chartered were the joint global coordinators and bookrunners of ICBC Macau’s A- rated deal.