Bank of Zhengzhou adds to wave of Chinese AT1 debt

The Chinese city lender joins borrowers issuing regulatory-compliant capital, tapping into robust investor demand for an extra shot of yield.

Bank of Zhengzhou, a Chinese commercial lender, raised $1.19 billion from the sale of a Basel III-compliant additional tier 1 bond this week, underscoring a growing appetite among Chinese lenders to issue the bank debt.

The bank’s maiden AT1 deal followed Postal Savings Bank’s sale of the instruments last month, which are used to recapitalize a bank’s capital structure and avoid the risk of using taxpayer’s money for a bail-out in the event of a distressed situation.

Yield-hungry investors bought the unrated paper because it offers a decent pick up over the five-year US Treasuries, or roughly about 356.7bp, according to bankers.

Banks globally have been issuing AT1 bonds, a type of hybrid security introduced in the wake of 2008 financial crisis. Such instruments can be converted into common shares if their capital ratios fall below regulatory levels, or can be completely written down by regulators.

Chinese lenders have sold $13 billion of the so-called additional tier-1 bonds so far this year, almost double what they issued last year entirely, Dealogic data show. At least four other issuers, including China Merchants bank and Bank of Chongqing, are looking to issue a total of Rmb30 billion of the loss-absorbing securities to foreign investors, according to their official announcements.

“It appears that investors in the Chinese dollar credit assume there is little chance of default in the banking sector,” a Singapore-based fund manager told FinanceAsia. “Markets are reluctant to heed the call of a return of monetary normalization,”

On Tuesday morning, unrated issuer Bank of Zhengzhou went out with an initial price guidance at 5.7%, before tightening the Reg S deal to the 5.5% area. Final pricing of the perpetual bond, which is callable in year five, was fixed at par to yield 5.5%, without paying any new concessions to investors.

The order book reached $1.5 billion before lunch, according to a syndicate banker running the deal. There was no further update on orders and the issuer did not release any deal statistics.

Bankers used Bank of Qingdao’s AT1 bond as a pricing reference. That debt was quoted on a yield of 5.5% on Tuesday morning, implying the new deal was priced in line with outstanding bonds in the secondary market.

In the secondary market on Wednesday, Bank of Zhengzhou debt was quoted on a cash price of 100.25/100.5, or 5bp to 7bp tighter than its reoffer price, according to market data.

If Bank of Zhengzhou does not redeem the bond in year five, the yield will be reset to a new fixed rate plus the sum of prevailing five-year US Treasury yield and a fixed margin. There is no step-up.

Joint global coordinators were CMB International, China Silk Road International, CITIC CLSA Securities, CCB International, Central China International Capital Limited, and Huarong Financial.

Joint bookrunners were ICBC Asia, China Industrial Securities International, BOCOM International, Guotai Junan Securities Hong Kong, SPDB International, Haitong International, Southwest Securities International, AMTD, China Merchants Securities Hong Kong, ABC International, CM Securities, Orient Securities Hong Kong, Zhongtai International, CICC HK Securities, BOC International, UBS, Ping An of China Securities Hong Kong, and BNP Paribas.


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