Zheshang Bank sells maiden AT1 capital

The Hong Kong-listed lender shrugs off volatility in global markets, issuing its first-ever dollar bond.

Just over a year after listing on Hong Kong’s main board, China Zheshang Bank, a commercial lender based in the country’s eastern Zhejiang province, has made its first foray into the international bond markets.

The bank raised a whopping $2.175 billion from the sale of a perpetual additional tier-1 bond.

Zheshang Bank sold the deal around the same time that Alipay, an Alibaba subsidiary that was a cornerstone investor in the bank's 2016 IPO, sold approximately $30 million worth of shares to a single investor, according to people familiar with the company. The deal was also launched in the midst of a downturn in investor sentiment, according to bankers.

But neither factor seemed to make much difference to investors' willingness to join an order book that rapidly swelled.

Zheshang Bank, rated Ba1 by Moody’s, pitched the perpetual non-callable five-year bond in "the 5.7% area," before tightening the Reg S deal to 5.45%, keeping the books open but telling investors the deal would price at that level. 

The coupon rate is fixed for the first five years. But on the fifth anniversary and every five years after that, the coupon will reset to Treasuries plus a fixed margin of 3.517%.

Unlike some of the callable perpetual bonds in Asia, Zheshang Bank did not include any additional step-up in the interest rate, making it less likely the issuer will redeem the outstanding bonds.

In the event of a distressed situation, the bank can convert the additional tier-1 bonds into stock at a conversion price of HK$4.01 per share. That could happen if the bank’s core tier-1 capital adequacy ratio falls below 5.125% or the China Banking Regulatory Commission, the banking regulator, deems the bank’s operations non-viable.

According to its annual results, the company's core tier-1 capital adequacy ratio stood at 9.28% in December last year, down from 9.35% the prior year. Its net interest margin, a metric of profitability, moderated to 2.07% from 2.31% for the same period.

The bank raised $1.9 billion from a Hong Kong listing in March 2016, selling more than $963 million of stock to a group of cornerstone investors including Zhejiang Seaport Group and Alipay Hong Kong.

Pricing benchmark

Syndicate bankers said the closest comparable was China Minsheng Bank’s $1.436 billion 4.95% perpetual note, which was trading at a cash price of 99 to yield 5.188% on Wednesday morning. Minsheng Bank, the nation’s largest non-state lender, is rated BB+ by Fitch and BBB by S&P.

Bankers also pointed to Huishang Bank’s $888 million 5.5% perpetual note as a second reference. The unrated bond was trading at a yield of 5.65%, or 15bp wider than its reoffer price. 

“The final pricing of Zheshang Bank was clearly inside the secondary curve of Huishang, a smaller bank by market cap,” said a syndicate banker running the deal.

Deal statistics for Zheshang Bank'a hybrid debt were not available at the time of writing. But according to an email sent out by the syndicate banks, the peak order book reached $4 billion — including interest from its bookrunners.

In the secondary market, the bonds were quoted on a cash price of 99/100 on Thursday, implying a yield of 5.457%/5.45%, according to market data.

The global coordinators were CITIC CLSA Securities, Haitong International, Ping An of China Securities Hong Kong Company, CMB International, CICC Hong Kong Securities, and HSBC, while BNP Paribas, CMBC International, CCB International, Goldman Sachs, ABC International, Bocom Hong Kong branch, SPDB International, Yue Xiu Securities Company Limited and China Silk Road International Capital Limited, BOC International were joint bookrunners.
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