Tianjin Binhai Rural Commercial Bank (TBRCB) has raised Rmb1.5 billion ($244 million) by pricing the country’s first Basel III-compliant bond last night, setting a template and testing investor appetite for a further $38 billion of issuance from the industry, including the big four lenders.
The tier-2 bond, which has a 10-year maturity and is callable after five years, attracted good response and was finally 1.27 times covered despite the unfamiliar structure. Demand reached more than Rmb3 billion, according to a source familiar with the situation.
The majority of the notes went to banking accounts, especially those of wealth management products (WMP) and private banks. Demand from the WMP accounts was driven by a need to balance their portfolios and conform to regulatory requirements, said another source involved on the transaction. Securities houses, trusts and credit cooperatives also bought the notes.
In line with Basel III requirements, Chinese banks must have full discretion to cancel coupon payments on tier-1 perpetual securities and the tier-2 bonds will write down to zero if the banks are deemed to be non-viable by the China Banking Regulatory Commission.
Investors in China tend to believe that the Chinese government will bail out any troubled bank, so the first offering of loss-absorbing capital instruments in China since the country enforced Basel III standards on January 1, 2013 will challenge the mentality. The success of the offering will set a template for planned issuance of larger lenders.
Agricultural Bank of China announced in June that it planned to issue up to Rmb50 billion of loss-absorbing tier-1 and tier-2 capital instruments by the end of 2015. While earlier, Bank of China, Industrial and Commercial Bank of China, and China Construction Bank also separately announced similar fundraising proposals for Rmb60 billion each.
TBRCB’s bond priced at 6.5%, which was at the top of the 6.2% to 6.5% range, compared to an average cost 4.5% for the other tier-2 financings in the market, said the second source.
“A few investors have concerns about the [loss-absorption] clause so they got different views on the pricing,” said Han Zexian, the company’s board secretary. “Some funds and big banks were asking for a higher yield because they took the bond as a riskier asset.”
Insurance companies, the biggest buyers of traditional subordinated bonds, are not allowed to invest in such Basel III-compliant bonds, which limited the investor base and reduced the issuer’s pricing power.
“We had deep communication with investors and educated them about the structure and write-off clause,” said Shi Youqi, a director of the fixed-income division at Southwest Securities, one of joint leads on the transaction. “We even calculated the anchor demand before auction to make sure the deal would get done.”
The credit squeeze in the interbank market has also made issuance more difficult. The deal was taken on roadshow during the height of the crunch, when the overnight Shibor hit 30%.
“Luckily, the credit crunch eased during the past weeks and investors were less sensitive during the pricing process,” said Shi.
TBRCB has total assets of Rmb59 billion and a non-performing loan ratio of 1.38%, as well as capital adequacy ratio of 12.18%, as of end-2012. A local rating agency Lianhe has assigned ratings of A+ to the notes and an AA- to the issuer.
Credit Suisse Founder Securities and Goldman Sachs Gao Hua Securities were joint leads on the deal.