Bank of China, rated A1/A/A, raised $500 million from a three-year green covered bond issue on Thursday. The deal marked the first ever sale of covered bonds from a Chinese bank — although covered bond experts might not recognise it as such.
Covered bonds are typically backed by a pool of retail mortgages. But in this case, the cover pool consists of renminbi-denominated green bonds, almost entirely sold by two issuers in China's onshore market. The bonds in the pool have a maturities ranging from 2 to 8 years, with a weighted average life of about 3 years.
Bonds of China Railway Corp and Shanghai Pudong Development Bank collectively represent 97.7% of the initial collateral pool. In theory, investors have recourse to both Bank of China and the underlying assets in the event of default. But Moody's analysts said the enforcement of the separation of the cover pool was hazy, and said there was a "weak level of asset ring-fencing protection".
In any case, investors do not appear to have given up much in exchange for the protection of the cover pool. The $500 million three year bond priced at 95bp over Treasuries, slightly inside the bank's secondary curve.
Syndicate bankers said the issuer's outstanding senior unsecured bonds were the best reference point for pricing. Bank of China's $500 million July 2019 1.875% note was trading at 109bp over Treasuries, or a G-spread of 98bp on a three-year basis.
But bankers also pointed to a pair of outstanding Asian covered bonds as second reference. Korean lender Kookmin Bank's $500 million 2.25% February 2021 bond were trading at a G-spread of 83bp. DBS's $1 billion 1.625% August 2018 bond offered a G-spread of 73bp.
The bookrunners set initial price guidance at Treasury plus 115bp, before narrowing that to between 95bp and 100bp. The final pricing of the November 2019 bond was fixed at 99.852% on a coupon of 1.875% to yield 1.9265, according to a term sheet seen by FinanceAsia.
Bank of China generate demand of $900 million from 49 accounts, a sharp contrast to what it achieved for its green bond sale in July, when it ended up with final demand of more than $7 billion for a $3 billion deal. But bankers say the market environment has become tougher over the last few weeks, and the novelty of the structure will have limited demand.
The group plans to use the new proceeds from the debt sale to fund eligible green projects in renewable energy, pollution prevention and control, clean transportation, and susitanable water management.
The joint global coordinators were Bank of China, Citi and HSBC, while Barclays, Bank of America Merill Lynch, China Construction Bank, Credit Agricole, Societe Generale and Standard Chartered.