China Citic Bank International raised a $300 million 10.5-year Basel III-compliant Tier 2 subordinated note with a callable option in 5.5 years on Thursday, in spite of investor concerns for the pricing and structural elements of such bonds.
In order to address investor fears over Basel III-compliant debt instruments, the Chinese financial institution sought to improve the bond’s structure by making it more investor-friendly, building on the foundation of ICBC Asia’s Tier 2 note issued early-October.
For example, Citic’s notes have solo recognition, meaning that the debt is qualified as Tier 2 capital for the bank itself unlike ICBC’s, which was structured to achieve capital recognition for both the financial institution and its parent, according to a source.
Additionally, Citic’s capital recognition guidelines are governed by the banking capital rules of Hong Kong while the point of non-viability (PONV) – a trigger where investors could lose all their money if regulators decide the bank cannot survive – is based on the Hong Kong Monetary Authority’s (HKMA) discretion. ICBC’s PONV is not only determined by the HKMA, but also the Chinese authorities.
Lastly, as opposed to ICBC’s full write-down policy upon a non-viability event, Citic’s will only be a partial and permanent write-down, adds the source.
“Because partial write-down is a possibility, Fitch was able to rate the bond one-notch below than they otherwise would have been under Basel II rather than two-notches as in the case in ICBC,” said the source.
Given the investor-friendly improvements, the BBB- rated Reg S-registered note was able to achieve a tighter final pricing of 6% versus the initial guidance of 6.375% area. The pricing of the bond fared much better than anticipated although some investors still had some price discovery issues, notes a syndicate banker.
In secondary markets, Citic’s bond outperformed by around 16bp from its reoffer spread of Treasuries plus 471.8bp to hit Treasuries plus 455bp.
“There have been some positive developments in this deal that will set the precedence for other banks to follow both in Hong Kong and beyond,” said the source. “This deal gave investors confidence in terms of the product and that it fundamentally worked.”
While some other Basel III-compliant products relied heavily on private bank’s participation, Citic was able to attract substantial institutional support for its paper, which received a sizable orderbook of $2.8 billion from over 170 accounts.
Fund and asset managers bought 43% of the notes followed by insurers with 30%, private banks 17%, corporate 5%, financial institutions 3% and others 2%, according to a term sheet. Asian investors subscribed to 77% of the papers, while the rest went to European investors.
BBVA, HSBC and Royal Bank of Scotland were the joint global coordinators and bookrunners of the deal. Other joint bookrunners include Citic Securities International and Goldman Sachs. ANZ and BNP Paribas were the co-managers.