CCB Life made its first foray into the international bond markets this week, selling a 60-year note that broke a long silence from Chinese insurers in the dollar hybrid market.
It was the first such deal since China Life, the country’s largest insurer by premiums, sold a $1.28 billion 60 non-call five-year hybrid in June 2015.
On Wednesday, the lead managers pitched the Reg-S bond at “the 4.8% area”, before narrowing price guidance to between 4.5% and 4.6%. The 60-year non-call five-year bond ended up being fixed at par to yield 4.5%, according to a term sheet seen by FinanceAsia.
Since early 2015, the China Insurance Regulatory Commission has been encouraging domestic insurance companies to issue hybrid securities — which mix debt and equity characteristics — to boost their financial health and capital ratios. But although most insurers have done as they were told, the vast majority of these deals have been sold in the onshore market, typically a cheaper source of funding.
Chinese insurers sold $9.29 billion worth of renminbi-denominated core tier-2 bonds in 2015, and another $6.56 billion last year, according to Dealogic data. The structure allows issuers to boost their capital while also allaying some investor fears about subordinated paper.
“Core tier-2 securities are generally more investor friendly because they do not have the loss-absorption feature and allows deferred coupon to be cumulative,” said a DCM banker. “In addition, core tier-2 bonds are rated much higher than banks’ additional tier-1 bonds,” the person added.
Mixing it up
The deal was structured with a coupon step-up. If the company does not redeem the bond at the first call date, the coupon will automatically be reset to the prevailing five-year US Treasury yield plus a margin of 2.68%.
In the search for fair value, bankers used China Life’s outstanding 4% core tier-2 bond as the major valuation benchmark. The bond, which becomes callable in in July 2020, was trading at 3.87% on Thursday morning.
After adjusting for maturity extension, CCB Life should add about 40bp on top of the China Life spread — and another 25bp to 30bp to account for the rating difference, according to estimates by bankers on the deal. This implies fair value of the new bond should be between 4.52% and 4.57%.
CCB Life generated around $2.4 billion of orders at peak level, according the banker. “The order book received a good mix of investors, ranging from institutional side to private banking accounts.”
According to its marketing material, the company's comprehensive solvency ratio under China's Risk-Oriented Solvency System (C-ROSS) declined to 158% at end-September 2016 from 201% at end-2015, largely a result of fast premium growth and the low profitability of its bancassuarance product portfolio.
CCB Life is 51% owned by China Construction Bank. China Life owns a 19.9% stake.
CCB International, HSBC and Morgan Stanley were the global coordinators, while CICC Hong Kong joined the trio as a joint bookrunner.
In the secondary market, the bonds traded slightly up on Thursday, being quoted around in the afternoon 100.05 / 100.14, according to market data.