China Construction Bank (CCB) completed a maiden Additional Tier 1 (AT1) offering on Wednesday that attracted a strong order book, topping $11 billion at its peak.
Investors piled into the $3.05 billion deal despite the likelihood of weighty issuance from the Chinese banking sector over the coming few years and questionable spread tightening from already tight levels.
They also stayed the course after pricing guidance was revised, with bankers reporting very little drop off in the final order book.
This enthusiasm almost certainly reflected the issuer's decision to be fairly generous with pricing after CCB offered a 10bp to 15bp new issue premium in a nod to markets, which are winding down for the year.
Syndicate officials said CCB was also conscious of the fact that mainland-based private banking investors were not as receptive to this deal as they were to previous issues by ICBC and Bocom because of the record low 4.65% coupon. Indeed, pricing at this level not only means CCB has achieved the lowest AT1 coupon on record for a Chinese bank but also from any Asian bank and most of the rest of the world as well.
Coupon rates have come down over the course of the past year thanks to the very strong technical bid from mainland private banking investors who have pushed spreads to very tight levels relative to peers from other countries. Many investors must be wondering how much spread compression is left, although some fixed-income analysts were saying exactly the same thing when levels were 100bp wider.
CCB's Basel-III compliant preference share deal has deployed exactly the same perpetual non-call five structure as previous issues for ICBC and BoCom.
The Ba2/BB rated Reg S deal was initially marketed at 4.85% before indicative pricing was tightened to 5bp either side of 4.7%. Final pricing was fixed at par on a coupon and yield of 4.65%, equating to 297.5bp over five-year Treasuries.
In terms of AT1 paper, ICBC and Bocom provided the nearest comparables. The former's Ba2/BB rated 6% December 2049 bond (callable in 2019) was trading on a mid-price of 106.25% on Wednesday equating to a yield-to-worst of 4.2%.
Bocom's 5% July 2049 deal (callable in 2020) has a one notch lower rating of Ba3. However, it has always traded tight to ICBC and was being quoted on a mid-price of 102.5% on Wednesday, equating to a yield-to-worst of 4.39%.
CCB's new deal has a one-year longer maturity than ICBC and five-months longer than BoCom. Bankers said that, on a like-for-like basis, both ICBC and BoCom would be trading around the 4.5% level, which is where they see fair value for the new CCB deal.
CCB's 3.875% May 2025 (callable 2020) Tier 2 bond was also trading Wednesday on a mid-yield of 3.87%. Bankers estimated the curve between May and December to be worth about 20bp, which means CCB's AT1 deal has been priced at a 58bp premium to its Tier 2 deal, or 43bp over on a fair value basis.
This incredibly tight premium highlights just how much spread compression has taken place since ICBC issued its $5.7 billion deal last December, generating an enormous $28 billion order book in the process. Back then, Chinese AT1 paper was being priced at a 200bp premium to Tier 2 debt.
By the time Bocom raised $2.45 billion in July, this had narrowed to about 100bp, with the bank generating a $9 billion order book. Bankers said the spread differential for most European banks is still around the 120bp mark.
Heavy pipeline
The big four state-owned Chinese banks are likely to become increasingly frequent issuers over the coming few years after the Basel-based Financial Stability Board (FSB) recently estimated they will need about $400 billion in capital absorbing instruments to meet new global capital guidelines.
Early last month the FSB added CCB to the list of global systemically important banks, joining Bank of China, ICBC and Agricultural Bank of China. At the same time, all four were given an additional six years over developed countries to meet new global rules on Total Loss Absorbing Capital (TLAC).
These have been introduced on top of the current Basel-III capital guidelines to ensure banks have enough of a financial cushion to prevent a repeat of the 2008 financial crisis, or at the very least make sure that investors bear the brunt next time round rather than taxpayers via government bailouts.
The Chinese banks have until 2025 to make sure that 16% of their risk weighted assets comprise corporate bonds and loss absorbing capital instruments. This ratio rises to 18% by 2028.
However, the FSB has said it may accelerate the schedule if China can build up its domestic bond market to 55% of GDP. At the moment, Chinese banks have very low holdings of corporate and capital bonds since most of their funding is deposit-based.
CCB has the best capital ratios of the four with an overall CAR of 14.97% at the end of September and core Tier 1 ratio of 12.73%. By contrast, ICBC reported a CAR of 14.43% and core tier 1 of 12.67%.
It also has the second largest asset base behind ICBC with total assets of Rmb18.32 trillion ($2.85 trillion) at the end of September.
According to Chinese regulations, AT1 deals incorporate low hard triggers. This entails compulsory conversion into equity if the banks' common Tier 1 equity ratio falls below 5.125%, significantly below the regulatory 7.3% minimum, which rises to 8.5% at the end of 2018.
The point of non-viability (PONV) and conversion to equity can also be triggered at the discretion of the CBRC.
Chinese bank AT1 paper also features dividend stoppers, dividend re-sets and dividend cancellation on a non-cumulative basis.
As a result of these features, CCB's AT1 deal has a four notch lower rating than its Tier 2 debt from Standard & Poor's. The agency says one notch derives from the subordination, two notches for the risk of non-coupon payments and one notch for the equity conversion feature.
Joint global co-ordinators for the bond deal were CCBI, HSBC, Standard Chartered and UBS. Joint bookrunners were CCB Asia, Bocom International, Citi, JP Morgan and Morgan Stanley.
