Two bank borrowers tapped the dollar and offshore renminbi markets with subordinated bonds on Friday amid a strong market rebound.
ICBC Asia became the first Asian bank to raise Basel III subordinated debt in the dim sum market with a Rmb1.5 billion ($235 million) bond. In contrast, Bank of East Asia (BEA) raised $500 million of so-called old-style lower tier-2 debt that has no loss-absorbency features and is not compliant with Basel III.
The BEA deal drew some criticism in the market when the leads — Citi, Deutsche Bank and UBS — unexpectedly hiked the final guidance. With a 10.5-year maturity, the bonds went out with initial guidance at 10-year Treasuries plus 500bp early Thursday afternoon, a few hours after EU leaders had reached an agreement preventing a Greek default. This was tightened to a final guidance of 10-year Treasuries plus 450bp to 475bp later that afternoon.
However, instead of pricing on Thursday night as investors expected, the leads took the unusual decision to tighten guidance by another 50bp to Treasuries plus 400bp to 425bp. Books closed on Friday with the bonds pricing at Treasuries plus 400bp, a massive 100bp inside the initial guidance.
Further tightening after the release of final guidance is rare, and about $600 million of orders reportedly fell away as a result.
“It was unusual,” said one Hong Kong-based investor on Friday. “A final guidance is usually final. We were looking at the trade and were keen to participate, but we decided not to after final guidance was revised.”
Despite some orders falling away, the deal closed with a robust order book of $4.4 billion from more than 230 accounts.
Rival bankers speculated that the leads had agreed to underwrite the deal at a wide spread and were keen to clear their risk. However, two people familiar with the deal claimed there was no written underwriting agreement in place and said that the reason for the substantial tightening was because of the much improved market sentiment after European leaders reached an agreement on Greek debt.
BEA and its bankers decided to go ahead with the deal in the morning, then watched markets shoot up throughout the day. European equities rose by more than 3% and Dow futures gained more than 200bp, while Asian credits tightened sharply on Thursday.
“You only get credit moves like these once in a few years,” said the first person familiar with the deal. “We saw Asian credits tighten by 70bp and cash moves of about 50bp to 75bp on Thursday. Yes, it was unconventional to tighten final guidance but we didn’t want to see the bonds tighten another 30bp in secondary, as we’ve seen with issues like KNOC.”
The deal also had a fairly unusual structure. The sub-debt is callable after five-and-a-half years but has no step-up — a feature that penalises borrowers who do not call their bonds. It has been rare for investors to go without such protection since the 2008 financial crisis, when a number of borrowers surprised investors by failing to call bonds.
Instead of a step-up, the coupon on BEA’s bond resets to a fixed rate equal to the prevailing five-year US Treasury rate on the first call date, plus the initial spread of 522.7bp. The initial spread is calculated using the yield at the time of pricing (6.395%) minus the five-year US Treasury yield (1.168%).
With rates around historical lows — and five-year Treasuries expected to be higher in five years time than now — investors are expected to get a bigger coupon when the bond resets. Meanwhile, BEA is able to hedge out the initial spread of 522.7bp.
The coupon is fixed at 6.375% and the notes were reoffered at 99.849 to yield 6.395% to May 4, 2022. Bank of East Asia’s issue is rated A3/BBB+ by Moody’s and S&P, both with stable outlooks.
Asian investors were allocated 83%, European 11% and offshore US 6%. Fund managers were allocated 36%, private banks 25%, banks 21%, insurers 12% and corporates and others 6%.
Industrial & Commercial Bank of China (Asia)’s Rmb1.5 billion ($235 million) subordinated debt issue also crossed the line on Friday, without revising its final guidance. The 10-year non-call-five offshore renminbi bond priced at a yield of 6%, at the tight end of the 6% to 6.125% final guidance. The initial whisper of low 6% was released late Thursday afternoon. There is no step-up in the coupon.
The books were in excess of Rmb5.1 billion from 83 investors. Hong Kong and China investors were allocated 77%, Singapore investors 9%, European and others 14%. Private banks were allocated 54%, insurers 20%, fund managers 11%, hedge funds 7% and others 8%.
ICBC Asia’s bonds include a “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 or if the bank needs an injection of public funds to rescue it.
HSBC, ICBC International and Bank of China were joint global coordinators and bookrunners. Credit Suisse, DBS and Goldman Sachs were also bookrunners.
