China Merchants Bank, a Shenzhen-based lender, raised $1 billion from the sale of a perpetual non-call five-year additional tier-1 bond on Thursday, building a capital buffer against the growth of bad debt in what seems a politically smart move.
The Reg S deal comes at the time when China's political heavyweights are attending the biggest political event in five years in Beijing, the 19th communist party congress.
One of the widely-discussed issues at the congressional meeting is the pace of deleveraging in the corporate sector. Key policy makers, including the People’s Bank of China governor Zhou Xiaochuan, have recently warned of the rising financial leverage among Chinese corporates, which pose risks for financial stability.
Responding to a question on the sidelines of the party congress, the 69-year-old central banker warned against excessive optimism that could lead to a “Minsky Moment”, a sudden collapse in asset values after a period of exhaustion of credit growth.
The IMF said in August it expected China's total non-financial sector debt to rise almost 300% of its GDP by 2022, up from 242% last year.
Historically a surge in credit usually leads to a wave of defaults and bad debt. Chinese banks have disposed, written off and reclassified Rmb979.9 billion ($178 billion) of non-performing loans in the first nine months of this year, according to official data. The non-performing loans at the country's lenders rose 61% in the past two years to Rmb1.58 trillion in March. In Guo's opinion, bad debt in China will multiply, sending a warning signal to investors who are hungry for return at the expense of deteriorating corporate fundamentals.
“With attractive yield, these bonds (AT1) are the most subordinated and designed to prevent the risk of using taxpayer’s money when a bank’s capital ratio falls below a certain regulatory level,” a Hong Kong-based fund manager told FinanceAsia. “Like the famous saying – you will find out who’s naked when the tide goes out.”
Currently investors are not discriminating between the price of bonds issued by large lenders such as ICBC and China Construction Bank and the smaller ones such as China Merchants, as investors do not expect any sharp deterioration in assets quality among the banks.
“Investors see those AT1 bonds as a safe bet at the moment,” said a debt banker.
Chinese banks have sold more than $13 billion of the hybrid capital so far this year, which is double what they sold for the whole year of 2016, according to Dealogic’s data.
Joining the fundraising bandwagon, China Merchants Bank, a BBB-rated company, went out with initial guidance at the 4.7% area on Thursday morning, before tightening the deal to 5bp each side of 4.45%.
The peak order book reached $3.9 billion, before moderating to $3 billion from 83 accounts, a syndicate banker told FinanceAsia. Chinese accounts took the majority of the deal, leaving the remainder 9% to others.
Corporate investors took 41%, fund managers/insurance firms and banks/financial institutions were 35% and 22%, respectively. Only 2% was allocated to private banks.
The bankers used Postal Savings Bank’s recently-issued AT1 as a valuation benchmark. The bond, which is callable in September 2022, was trading on par to yield 4.5% on Thursday, implying the new China Merchants Bank’s deal was priced just inside its larger peer.
Despite aggressive pricing, the new deal traded up in the secondary market on Friday. The bond was quoted on a cash price of 100.25 to yield 4.35%, or 5bp tighter than its reoffer price.
The ratio of non-performing loans to assets at the Hong Kong-listed lender fell slightly to 1.71% in June, down from 1.87% in December last year, as loan growth surpassed the stock of bad debt, according to its latest results.
