Agricultural Bank of China, the country’s third-largest lender by market value, has raised Rmb40 billion ($6.5 billion) through the onshore market’s first preference share issue, setting a benchmark for upcoming offerings.
The deal received strong interest and the book was just under 1.5 times covered, according to a source close to the deal. This enabled the issuer to tighten its pricing twice from an initial price guidance range of 6% to 7% to a final price of 6%.
Diverse investors, including insurance companies, bank wealth management accounts, mutual funds and corporate pension funds, participated in the bookbuilding, which started on October 31.
The sale was privately placed to less than 200 investors due to mainland regulation on securities, which limits investor participation in such issuance.
The final allocation will be out mid-November and the shares will start trading on the Shanghai Stock Exchange on November 20, according to sources.
“The transaction was driven by the favourable policy environment for the issuer,” said a source close to the deal. “Investors, meanwhile, like the nice dividend yield and the company’s name.”
Preference 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.
ABC’s preference share offering comes at a time when Beijing is encouraging Chinese lenders to use multiple channels to replenish their capital bases and meet Basel III requirements for capital ratios.
Including ABC, at least 11 companies, including eight lenders, have announced plans to raise a total $61.5 billion through preference shares. China Securities Regulatory Commission approved a proposed Rmb30 billion offering by each of Shanghai Pudong Development Bank and Industrial Bank on Monday.
Bank of China will be the next one to tap the onshore market for its proposed Rmb60 billion preference share offering.
The country has loosened monetary policy by injecting liquidity into the banking system, which lowers the market interest rates from last year’s peak and adds more attractiveness for preference shares in terms of yield.
China Insurance Regulatory Commission also issued guidelines for insurers on October 17, two weeks before ABC’s issuance. The guidelines clarify that insurance companies can buy preferred shares, opening the door for their investments in such notes.
Insurance companies have taken a considerable part of the shares, said sources. The dividend yield of 6% and the perceived safety of such a big state lender are attractive to insurers, which usually have an investment return of 3% to 4%.
The offshore preference shares issued by Bank of China on October 15, the first ever by a mainland company, have also helped to improve investor confidence in the capital instrument. The $6.5 billion bond, also the biggest single tranche dollar-denominated bank capital sale, attracted large demand with the book more than three times covered.
China Chengxin International rated Agricultural Bank of China at AAA and the note at AA+.
China Galaxy Securities, CICC, Citic Securities, Credit Suisse Founder Securities, Goldman Sachs Gao Hua, Guotai Junan, Haitong Securities and Southwest Securities were joint bookrunners on ABC’s transaction.
Credit analysts remain sceptical about the onshore preference shares for several reasons.
The biggest concern is the notes’ liquidity, according to analysts. Compared to bonds, the stock exchange-listed shares may not see much trading in the secondary market, according to a manager with the investment unit of an insurance company.
In addition to worries over Chinese lenders’ growing non-performing loans, there are also concerns about the performance of the Chinese economy, which has been showing signs of fragility in the past few months.
ABC recorded a 6.1% growth in net income to Rmb48.4 billion for the third quarter, according to a company statement released on October 30. It was the worst quarterly profit growth since 2011.
