Chong Hing Bank raised a capped $300 million perpetual bond callable in year five on Thursday, the second Asian financial institution to sell an Additional Tier 1 note.
The Reg S-registered offering priced at the tighter end of its final guidance at a yield of 6.5%, tightening by 37.5bp from its initial price guidance, indicating buoyant investor support for these Basel III-compliant notes.
“There were a couple of factors that supported Chong Hing’s price — its strong road show, the capped sized and the fact that it’s one of the very few Hong Kong banks that is rated by the HKMA,” said the source, adding that the issuer had to go through quite an extensive global road show to educate and update investors post-recent change of ownership.
Chong Hing is now 75% owned by Yue Xiu Enterprises — unrated and wholly-owned by Guangzhou’s municipal government — following a change of controlling shareholders in February.
Rating agencies, as a result, prompted investors to exercise caution towards the credit due to this change. In a recent note, Moody’s said that “the change in controlling ownership from the Liu family to Yue Xiu could herald faster growth and more proactive risk taking” with “lending in Southern China [to] likely increase over time”.
Despite such warnings, Chong Hing’s bond still managed to receive a total order book of more than $4.8 billion from over 155 investors, suggesting that investors enjoy its newly attained state-owned enterprise-like status, said sources familiar with the matter.
Asian investors subscribed to 91% of the notes, while the rest went to European investors. Fund managers purchased 58% of the paper, followed by private banks 32%, corporates 6% and banks 4%, adds the source.
In secondary markets, the bond has traded up from par to 100.3, according to Bloomberg data.
Comparables
Citic Bank’s AT1 bonds, rated one notch lower than Chong Hing’s, were used as comparables and were trading at a cash price of 103 or yield of 6.48% prior to announcement.
If Citic were to issue new AT1 notes, fair value for the notes would be around 6.62% after adjusting for the curve. After taking into consideration the new issue premium, that will take Citic’s hypothetical offering to an overall cost of 6.75%. This means that Chong Hing managed to price inside of Citic’s, saving 25bp.
“Given the supply ahead, this could very well be the tightest-printed US dollar AT1 in Asia for the foreseeable future,” said a separate source familiar with the matter, adding that ICBC could issue a similar-structured AT1 in the coming months.
While it might be a good thing for the issuer, it might not be for investors who believe they’d be able to pick and choose better offerings from the expected tidal wave of AT1 paper from major Chinese banks in the next few months.
“We would not suggest investors with a longer-term investment horizon chase this deal too aggressively,” said an Asian fixed income trader.
This is especially the case with the shorter-dated 2018 bond issued by Yue Xiu’s subsidiary, Yuexiu Property, which is currently offering around 200bp less than Chong Hing’s AT1 deal.
“While comparing a Hong Kong bank to a Chinese property developer is hardly apples to apples, we have to think that Yuexiu’s property arm faces negligible refinancing risk now that its parent company owns a bank,” added the fixed income trader.
Structure
Chong Hing’s bond will pay a fixed coupon for the first five-years and if not called, it will reset at Treasuries plus an initial margin of 462.8bp and every five years thereafter, according to a term sheet seen by FinanceAsia.
As a Basel III-compliant bond with loss absorption features — triggers where investors could lose all their money if regulators decide the bank cannot survive — Chong Hing’s AT1 note will be rated Ba2, three notches below its senior unsecured ratings of Baa2/BBB.
Under the terms of the proposed deal, the bonds can be fully or partially written down should the Hong Kong Monetary Authority determine that without such a write-off, the bank would become non-viable or if the bank receives a public sector capital injection without which it would become non-viable.
Credit Suisse, HSBC, Nomura and UBS are the joint coordinators and bookrunners of Chong Hing’s bond.
