Bank of East Asia completed its debut Basel III compliant Tier 2 bond on Thursday, raising $500 million from a deal that underlined how comfortable investors are becoming with the new asset class.
The BBB- rated issue was priced at 99.608% on a semi-annual coupon of 4.25% to yield 4.338% or 270bp over Treasuries. The deal has a 10-year non-call five structure, with the call option falling due on November 20 2019 and the coupon re-setting to 270bp over the prevailing five-year Treasury.
The Reg S deal attracted an order book of $4 billion and 200 accounts even after pricing was tightened from an initial range of 300bp over Treasuries to 5bp either side of 275bp over.
Allocations saw 87% of the paper placed in Asia, with the remaining 13% in Europe. By investor type, fund managers took 55% followed by insurance companies on 22%, private banking 14% and banks the remaining 9%.
In terms of pricing comparisons, Bank of East Asia has an A2/A rated 2.375% 2017 senior bond outstanding. This was trading on Thursday at about 147bp over Treasuries, or 126bp on a G-spread basis.
The new deal has come at a premium of about 123bp without accounting for the additional two-years maturity. On a like-for-like basis, bankers said a new senior deal would probably come around the 155bp level, which equates to a 115bp premium.
The group also has existing subordinated Tier 2 debt outstanding, including a 6.375% 2022 deal callable in 2017. This Baa3/A- rated deal was trading Thursday at 235bp over Treasuries.
In terms of existing Basel III compliant paper, there are now a number of Chinese bonds to choose from. The most recent is a $3 billion Tier 2 deal from Bank of China, which has traded extremely well since its launch last week.
Having been priced at 5.052% to yield 270bp over Treasuries, the 10-year bullet deal has tightened 23bp over the course of the week and is currently bid around the 247bp level.
The cost of Bank of East Asia's call options equates to about 15bp to 20bp, which means it has priced at a premium of 3bp to 8bp on a like-for-like basis. This is pretty impressive given that Bank of China's deal has a two notch higher rating of Baa3/BBB+/BBB+.
Part of the reason for Bank of East Asia's success is its Hong Kong credit profile. It also has better Point of Non Viability (PONC) terms than Bank of China's Tier 2 deal.
Bank of East Asia's deal has partial or full write-off compared to Bank of China's full write-off. And it will be the Hong Kong Monetary Authority, which determines the PONV trigger rather than the China Banking Regulatory Commission in the case of Bank of China.
"Bank of China's success really helped this deal," one banker said. "It was a big, liquid transaction and it really built the distribution profile for Asian Basel III compliant bonds, drawing in investors from the US and Europe as well as Asia."
"It has not only made existing investors more comfortable with this new asset class, but also bought momentum to the market."
Bank of East Asia's is Hong Kong's fifth largest bank in terms of assets behind HSBC, Bank of China Hong Kong, Hang Seng Bank and Standard Chartered. As of June it reported assets of $103 billion and an ROAA of 0.9%.
Investors have long accorded it a pricing premium because it has not sacrificed credit quality despite strong loan growth on the Mainland, where it has 128 outlets. As of June it recorded an impaired loan ratio of 0.4% in line with the Hong Kong sector average.
At that point, its overall capital adequacy ratio stood at 15.7% of which Tier 1 comprised 12.2% and Common Equity Tier 1, 11.6%.
Bookrunners for Bank of East Asia's new Tier 2 Basel III compliant deal are Citigroup, HSBC, JP Morgan and Morgan Stanley. SMBC Nikko and SCB were co-managers.