Bank of China has raised a $6.5 billion Basel III-compliant Additional Tier 1 note — the biggest single tranche dollar-denominated bank capital sale ever — boosting much-needed capital buffers to counter China’s growing non-performing loans issue.
The bond — the first offshore preference share offering from a Chinese company — received a whopping order book of $21.8 billion from more than 200 accounts, according to a source close to the deal. This enabled the issuer to tighten its pricing from an initial price guidance range of between 6.875% to 7% to a final price of 6.75%.
BOC’s debut dollar-denominated AT1 offering had guaranteed orders of $14 billion before initial pricing talks, including some anchor demand of $5 billion, according to two bankers on the transaction.
“The transaction was driven by sizable anchor orders from strategic investors post a three-day road show in Asia and Europe,” said a source. “The transaction was swiftly executed within 14 hours despite the record breaking issue size and unique structure of its kind.”
The market was also expecting a euro tranche along with this dollar offering. But sources on the deal said the overwhelming demand for the dollar note was a reason to why they didn’t launch a euro tranche.
BOC, China's fourth biggest lender by market value, is the first among a long list of Chinese lenders looking to replenish their capital bases and meet tougher regulatory requirements for capital ratios. The issuance of preference shares is one way to boosting their capital.
Banks are coming under additional pressure as China’s economic growth slows and bad debt accumulates in the banking system.
Non-performing loans touched a five-year high of Rmb694.4 billion ($113 billion) on June 30, making it more urgent for Chinese financial institutions to build capital cushions against losses.
Beijing-based BOC said it more than doubled the money it set aside for bad loans in the second quarter. It had received regulatory approval to issue Rmb40 billion of offshore notes eligible as Tier 1 capital. The lender can also sell as much as Rmb60 billion of Tier 2 notes before end-2015.
The deal should boost BOC’s common equity Tier 1 capital adequacy ratio to 10.12% from 9.7%, according to the circular. The People’s Bank of China requires the country’s systemically important banks to have a 9.5% ratio before end-2018.
Preferred share perks
Preferred stock shareholders typically do not have voting rights but have seniority over common stock shareholders in the event of asset dispersals in a bankruptcy case scenario.
The securities — callable in five years and on any dividend distribution payment date thereafter — will be converted into BOC’s H-shares at HK$3.44 ($0.44) a piece if its Tier 1 ratio falls to 5.125% or below.
While there are perks to holding preference shares, credit analysts remain sceptical about Chinese banks’ capital instruments for a few reasons.
Firstly, the level of profits the financial institutions are able to generate over the medium-term depends on the performance of the Chinese economy, which has been fragile in the last few months, and the extent to which the Chinese government will step in to ensure that government-linked borrowers are able to service their debt, said one credit analyst.
Secondly, although credit analysts remain confident that the government will not allow defaults by any major Chinese bank, they are less certain this protection will be extended to loss-absorbing capital instruments and distributions payable on them.
Asian investors subscribed to 94% of the notes, while the rest went to European investors, according to bankers familiar with the matter. Insurers and sovereign wealth funds purchased 45% of the paper, followed by private banks with 29%, funds 14%, corporates 7% and financial institutions 5%.
BOC International is the global coordinator on the deal and joint book runner together with BNP Paribas, China Merchants Securities, Citic Securities International, Citi, Credit Suisse, HSBC, Morgan Stanley and Standard Chartered.
