Two lower tier-2 issues get away despite volatile markets

Fubon Bank (Hong Kong) and ICBC (Asia) raise a combined $700 million, while Vinacomin pulls its $500 million offering.

The Hong Kong branch of Taiwan's Fubon Bank and Industrial and Commercial Bank of China (Asia) both hit the market with subordinated lower tier-2, 10-year issues on Monday night.

Fubon Bank (Hong Kong) raised $200 million and became the fifth issuer globally to print a bond with a regulatory switch since Credit Agricole priced the first bond using that structure in mid-October. Meanwhile, ICBC (Asia) decided to opt for a $500 million 10-year bullet issue with no regulatory call or switch.

The switch structure was introduced in anticipation of potential changes in the dynamics of lower tier-2 capital as a result of Basel III. The structure allows investors to hold on to a credit that they like and avoid having the bonds called.

“The structure is well understood by investors. We saw the first one globally in mid-October and since then we’ve seen five issues using that structure,” said one banker.

After the Credit Agricole bond, Chong Hing Bank, ICICI Bank (UK) and French retail bank La Banque Postale have all issued bonds with a regulatory switch in quick succession.

The Fubon bonds will switch to senior unsecured notes if they are disqualified as subordinated debt on or after January 1, 2013 and will be recategorised as supplementary capital.

The 10-year bonds offer a 6.125% coupon, which will step down by 50bp upon the regulatory switch, which is similar to Chong Hing Bank. Credit Agricole and La Banque Postale were both euro trades with a 30bp step-down.

The initial yield guidance for Fubon was 6.25% to 6.375%. The notes were reoffered at 99.447 to yield 6.20%, which translates into a spread of 333.6bp over 10-year Treasuries. Deutsche Bank and UBS were joint bookrunners.

Meanwhile, ICBC (Asia) priced its $500m lower tier-2 issue at Treasuries plus 235bp, at the tight end of the final guidance of Treasuries plus 235bp to 237.5bp. The notes pay a coupon of 5.125% and were reoffered at 99.737 to yield 5.159%.

Bank of America Merrill Lynch and HSBC were joint bookrunners. HSBC also acted as global coordinator, while ICBC International was a joint lead manager (no books).

The comparable for ICBC (Asia)’s new bonds was Bank of China's February 2020 bonds, which were trading at a z-spread of 214bp. On a z-spread basis, the new ICBC (Asia) bonds, which are due in November 2020, came at 220bp or about 6bp wider.

According to one banker, ICBC (Asia) chose not to issue its lower tier-2 bonds with a regulatory call, although its programme allowed it to do so.

Fubon’s new bonds came about 100bp wider than ICBC (Asia), with the latter being a much bigger bank with a stronger rating. ICBC (Asia) has an issue rating of A3 stable from Moody's and BBB+ (positive watch) from Fitch, versus Fubon’s BBB (stable) rating by Standard & Poor's. Fubon is not rated by Moody’s and Fitch.

Both bonds tightened nicely yesterday morning (Hong Kong time) but then widened out by the evening as investors were rattled by news that North Korea had fired shots into South Korean waters.

Amid these jitters, South Korean five-year credit default swaps (CDS) swelled 15bp from 85bp/89bp yesterday morning to 100bp/102bp last night, pulling the broader market wider as well.

The Fubon 2020s were trading at Treasuries plus 331bp yesterday morning, or about 2bp inside the issue spread. They were quoted slightly wide of their reoffer last night.

Meanwhile, the new ICBC (Asia) 2020s initially tightened to Treasuries plus 232bp yesterday morning, 3bp inside the issue spread, before widening out to Treasuries plus 237bp last night.

The Fubon issue was five times covered and attracted 135 orders. Geographically, Asia took 84% and Europe 16%. By investor type, funds took up the lion’s share (49%) followed by private banks (31%), banks (15%) and others (5%). There was a 25bp rebate given to private banks for selling down the bonds.

ICBC (Asia) achieved a total order book in excess of $1.6 billion from 135 accounts. Fund managers took up the bulk (42%), and the deal also saw strong participation from insurance companies, pension funds and central banks, which bought a combined 28%. Private banks took 24% and banks and corporations 6%. Asia accounted for 84% of the allocation, while US offshore and Europe took 16%.

ICBC (Asia) is expected to become fully owned by its parent ICBC as minority shareholders of ICBC (Asia) have approved a privatisation plan, which implies stronger parental support for the issuer.

The lower tier-2 bonds got away despite volatile market conditions that saw Vietnam National Coal and Mineral Industries (Vinacomin) pull its $500 million 10-year Reg-S/144A bond, which was jointly led by ANZ, Citi and Credit Agricole. The company had gone out with guidance at the 7.25% area and was due to price Monday night.

Vinacomin’s decision to pull the issue was surprising as the deal was rumoured to be well covered ahead of the pricing, but a banker close to the company said that market conditions turned against the issuer and, against that backdrop, closing a deal for a high-yield credit such as Vinacomin became very difficult.

¬ Haymarket Media Limited. All rights reserved.
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