Industrial & Commercial Bank of China (Asia) yesterday launched its benchmark lower tier-2 issue, in what is the first subordinated bond in the nascent offshore renminbi bond market. The bank is also poised to be the first Asian bank to issue Basel III compliant debt.
ICBC Asia’s 10-year non-call five-year bond was marketed to investors in the area of low 6% Thursday afternoon and is expected to price as early as today. A benchmark deal is about Rmb1 billion ($157 million) in the dim sum market.
As scores of Chinese banks are also looking to issue sub-debt, the market will be watching closely to see how ICBC Asia’s dim sum is received by investors. HSBC and ICBC International are joint global coordinators and bookrunners. Bank of China, Credit Suisse, DBS and Goldman Sachs are also bookrunners.
ICBC Asia’s bonds have a so-called “non-viability loss-absorption” clause, which means that the value of the bonds will be written down to zero if the bank is declared non-viable by the Hong Kong Monetary Authority (HKMA) or if the bank requires an injection of public funds to rescue it.
However, it is not clear at which point the HKMA would declare ICBC Asia non-viable and, at the same time, it is difficult for investors to quantify how much that risk would be worth. Ratings agency Fitch has an expected A- rating for ICBC Asia’s dim sum, the same rating as the bank’s other non-Basel III-compliant sub-debt.
“ICBC Asia’s subordinated offshore renminbi bond is similar to other lower tier-2 subordinated bonds issued by Hong Kong banks in that coupons are not deferrable. However, the Hong Kong authorities can decide that the bank has become non-viable and this will prompt an irreversible writedown in the principal and the bonds will stop paying coupons,” said Sabine Bauer, an analyst at Fitch Ratings.
“HKMA’s exact definition of the non-viability event is unclear. We think it will be at a point where the bank would require direct Hong Kong sovereign support to avoid a default. However, we believe that ICBC Asia’s China-based parent and the Chinese authorities will not allow ICBC Asia to fail.”
While Asian banks have so far not issued Basel III-compliant capital, their European peers such as Credit Suisse have issued compliant capital with loss-absorption clauses. But this contingent capital converts to equity on the bank’s common equity tier-1 ratio falling below 7%. In contrast, ICBC Asia’s sub-debt does not convert to equity at any point.
According to one person familiar with the deal, the ability to convert to equity would have been a more investor-friendly structure — as investors would be left with equity instead of a bond that is potentially worthless. However, ICBC Asia was recently de-listed and the bonds would have had to convert to equity of the mainland parent, which was difficult for regulatory reasons.
However, in all likelihood, ICBC Asia’s bonds will only be written down if the bank hits dire straits. “Credit Suisse’s contingent capital is quite different from ICBC Asia’s sub-debt. For the former, the trigger kicks in when the bank is a ‘going concern’ whereas in the case of ICBC Asia, it kicks in when it is a ‘gone concern’, basically when the bank has gone bust,” said the person familiar with the deal. “For that reason, Credit Suisse’s contingent capital is rated four to five notches below the parent and ICBC Asia’s sub-debt is only one notch below,” he added.
ICBC Asia is the Hong Kong-incorporated arm of mainland lender ICBC. The proceeds will be injected into ICBC Asia’s 100%-owned mainland-based subsidiary Chinese Mercantile Bank.
The investment will be the first of its kind under the foreign direct investment scheme that the mainland authorities introduced in September to allow Hong Kong entities to make direct renminbi investments into China. Fitch expects ICBC Asia’s tier-1 and total capital adequacy ratios to stand around 10% and 16% by the end of 2011 respectively.