Last week’s US dollar Additional Tier 1 capital bond from Bank of Communications (BoCom) was not only a first from a bank in China, the innovative deal could also pave the way for the manner in which onshore lenders are likely to raise such capital going forward.
The lender, one of the biggest in China, sold a larger-than-expected Basel III-compliant $2.8 billion perpetual bond. Although these bonds have no maturity date, they often have a call date. In this case, it is after five years.
There was significant demand both onshore and offshore for the Reg S deal. Books that tipped $4 billion allowed pricing to come in 35 basis points before the bond printed at par with a yield of 3.8%.
Although the bank’s credit quota would have allowed it to issue as much as $3 billion, it felt that $2.8 billion was the right size.
“The bank likes to do market-driven deals,” said a banker close to the deal. “We had expected the size to be around $2 billion to $2.5 billion, but given the stickiness of the order book and the fact that investors seemed receptive to a larger size, we managed to clear a larger deal.”
Ahead of the bond sale, investors were looking at a February issue from Bank of China and a September issue from Industrial and Commercial Bank of China (ICBC) as comparable deals.
The former sold a $2.8 billion 3.6% offshore preference share issue in February, while the latter sold a $2.9 billion 3.58% similarly structured deal in September.
While there is a significant difference in terms of pricing between the deals, the banker said this was a reflection of the ratings difference between the banks, and their sizes. ICBC and Bank of China are, respectively, the largest and fourth-largest banks in the world by assets.
While Bank of China and ICBC are rated A1/A/A and A1/A (Moody’s/S&P) respectively, BoCom is rated A2/A–/A.
Bankers close to the deal said that the bond priced at fair value, although those away from it suggested that the bank had paid a 10bp-15bp premium.
The Bank of China and ICBC bonds were both trading in the secondary market before the BoCom deal priced at around 3.5%. The 30bp difference can be ascribed both to a ratings differential as well as a small premium.
The book was diverse but dominated by Chinese names – financial institutions as well as some corporate accounts – along with institutional accounts from Asia. European pension funds participated as well.
After the bonds had priced, they traded slightly tighter in the secondary market. The next day they were seen at 3.79%.
Game Changer
Banks globally have actively strengthened their Tier 1 capital – the core measure of a bank’s financial strength from a regulator’s point of view – since the Global Financial Crisis of 2007-2008. According to the Bank for International Settlements (BIS), that of the world’s largest 100 banks increased by 98%, or by around $2.3 trillion between 2011 and 2019.
And as Chinese banks continue to dominate the ranking of the world’s top banks, they have increased their Tier 1 capital by 14% since last year.
What makes the new perp bond from BoCom significant is its structure. Chinese banks have traditionally raised Additional Tier 1 Capital via offshore preference share issues, but the China Banking and Insurance Regulatory Commission (CBIRC) has been encouraging banks to issue perpetual bonds, to bring them in line with international norms.
“The proposed bonds have lower recovery expectations than for higher-ranking securities, due to their subordination status and write-off features. The proposed bonds will be irrevocably written-off, in whole or in part, upon the occurrence of a non-viability trigger event,” said Fitch in a note as it rated the bonds at BB+.
The perpetual bond does not have an equity conversion feature and “the mechanism [in case of a bank failure] here is via the principal right down,” explained a banker on the deal.
The shift towards perpetual bonds will make it easier for banks to raise money offshore even if they are unlisted. That in turn makes it easier for banks to maintain their Tier 1 capital ratios, and should encourage many more more banks to follow suit in the time ahead.
Joint global coordinators on the deal were BoCom and JP Morgan. They were joined as joint lead managers and joint bookrunners by BoCom International, Credit Agricole, HSBC, Goldman Sachs, Citigroup, China International Capital Corp, ANZ and BNP Paribas. Co-managers were Huarong International and Guotai Junan International.
