In addition to providing the international debt markets with the year's first transaction from Asia, BoEA's 10 non call five deal also heralds what is expected to be a series of offerings from the region's better rated banks, as they seek to adopt more efficient mixes for high capital adequacy ratios.
For BoEA, the lower tier 2 deal will enhance the bank's return on equity and also reboot capital adequacy ratios that fell following its acquisition of First Pacific Bank (FPB). Roadshows for the 144a registered deal began in Singapore on Monday, moving to Hong Kong for Tuesday and Wednesday.
The team then moves to Europe today (Thursday) for presentations in Frankfurt, followed by London on Friday and the next Monday. Roadshows will then commence in the US after Martin Luther King day on Tuesday, beginning in Boston and finishing in New York on Thursday. Pricing will then take place either later that day, or Friday.
JP Morgan, which advised BoEA on its takeover of FPB, is bookrunner and Barclays co-manager. Fees total 65 cents, with the deal marking the first instance of JP Morgan and Chase's syndicate and sales teams working together as one on a transaction.
According to investors, indicative pricing is being talked around the 175bp to 187.5bp mark over Libor, equating to a Treasury spread of about 260bp to 270bp over. Formal price talk, however, will be released at the start of US roadshows next week. At present indicative levels, the deal would price flat to the current bid of an outstanding $350 million 7.75% January 2007 issue by Hong Kong's Dao Heng Bank.
But, while Dao Heng is likely to provide the main pricing benchmark, its current secondary prices are not regarded as true levels, since the deal is extremely illiquid after over half of it was bought back. Consequently, some market observers believe that a symbiotic relationship will develop between the two deals, with Dao Heng's spreads tightening in 10bp to 15bp as roadshows for BoEA progress and its story gathers momentum.
As one observer puts it, "The big question is not whether Bank of East Asia should price wider than Dao Heng, but where should Dao Heng really trade?"
On a like-for-like basis, market players agree that BoEA should price slightly wider than Dao Heng, because it is rated one notch lower by Moody's. The latter has a Baa1/BBB sub debt rating, while BoEA is rated Baa2/BBB. Fitch has also assigned the deal a BBB+ rating.
BoEA's offering will also effectively have a one year shorter maturity than Dao Heng, but any savings will largely be offset by the need to price step up structures slightly wider to compensate for tail end risk in the eventuality of the step up being activated.
Asian investors to play important role
Pricing tension is expected to be driven by Asian investors, who look set to play a much larger role in this deal than previous sub debt offerings, which have been predominantly been dominated by US accounts. It is said that up to roughly 40% of overall demand could be generated from the Asian region, with Hong Kong investors likely to provide the biggest new source of demand.
As one observer puts it, "Hong Kong investors have a horrible record for not buying Asian sub debt, so this represents an excellent opportunity to introduce them to a new asset class. It's a name they will be very comfortable with and it will offer a decent yield. Demand from Singapore should also be strong and there may be a showing from Taiwan as well."
The deal should further benefit from its timing. As one banker notes, "This deal has two things going for it. The leads have been very lucky in their timing. They will be able to take full advantage of the Fed's rate cut and the strong bond market that is emerging behind it. The deal is also fairly unique in that there has really been very little like it from Hong Kong before."
While both HSBC and Standard Chartered have previously issued sub debt, both are regarded as hybrid issuers, given that their asset bases span Asia, Europe and the US. Asia's only other investment grade comparables are Singapore's DBS, which has a Aa3/A- sub debt rating and Maybank, which has a split Baa2/BB+ sub debt rating. The latter has a 7.125% September 2005 issue outstanding and observers believe that should BoEA set a successful benchmark, Maybank's current 278bp/263bp trading levels will be pulled in strongly on the back of it.
A more capital efficient mix
The deal will result in BoEA boosting capital ratios back up to Hong Kong's 19% average, of which 13% will constitute tier 1 capital. To the nine months ended September 30 2000, BoEA maintained an 18.3% level, of which 16.7% comprised tier 1 capital and 1.6% tier 2. Following the acquisition of FPB, the overall level dropped to just below 15% according to Fitch, but was still some way above the 12% average maintained by G7 banks.
By increasing tier 2 capital and keeping tier 1 at a lower level, BoEA will be able to enjoy a more advantageous capital mix that will boost its return on equity, currently standing at 13.5%. Hong Kong banks have traditionally employed higher levels of tier 2 debt than their nearest comparables in Singapore, which are renowned for their low returns on equity, scoring a 9% average in 1999 according to figures provided by Bankscope. Hong Kong, by contrast stood at 13% during the same period.
As Fitch analyst Arthur Lau comments, "Hong Kong and Singaporean banks are both strongly capitalised, but in Singapore tier 1 capital levels are much a higher as a percentage of the total. As a result, Hong Kong banks report higher roe's, with Hang Seng Bank, for example, recording a 20% plus level. This makes Hong Kong banks much more efficient in their use of capital."
China a key credit determinant
BoEA's main weak spot has been identified as the NPLs which result from its China exposure and stand above the market average. Peaking at 7.9% in 1999, NPL's have now been reduced to 6.5% and are slated to fall to around 4% by the end of the year should the bank conclude restructuring agreements with some of the five mainly ITIC credits which caused its initial problems.
By assets, China accounts for 6% of BoEA's exposure versus 74% for Hong Kong. The only Hong Kong incorporated bank to hold Renminbi licenses in both Shenzhen and Shanghai, BoEA is also said by Chairman David Li to be the Mainland's most profitable foreign bank.
Analysts attribute this feat to BoEA's strong niche in providing mortgages for Hong Kong residents buying property on the Mainland. By industry sector, overall individual mortgage loans account for 42% of the bank's portfolio and delinquency levels are said to stand below the market average.
In total, the bank will have 18 outlets in China as a result of news that it has been granted permission to open the PRC's first foregin bank branch in Xian. In this respect, acquiring FPB was crucial to its expansion ambitions, since the PRC only allows banks with assets above the $20 billion mark to open new branches. Following the takeover, BoEA's asset base has reached the $22.4 billion mark.
Internationally, the bank has 18 outlets, most of which are dedicated to serving overseas Chinese and are concentrated in Chinatown districts of cities like New York, London and Toronto.
During investor presentations, BoEA officials explained that FPB should allow the bank to dramatically increase cross selling and make full use of its internet banking capabilities. BoEA was the first in Hong Kong to introduce both internet banking and online real-time stock trading. It now intends to market this expertise to FPB's 50,000 strong consumer banking franchise.
By making greater use of its electronic platform, it also hopes to turn most bank branches away from their traditional role as processing centres and into fully fledged sales centres.