ICBC Asia, the offshore subsidiary of China's largest bank ICBC, sold a $1 billion alternative tier one bond on Thursday evening.
It was the first dollar bond in the AT1 format from an Asian lender this year, although United Overseas Bank has sold an AT1 deal in the Singapore dollar market.
The rarity value appeared to help: the deal generated orders of around $10bn before final price guidance was announced, allowing ICBC to get away with pricing that some analysts thought was aggressive.
The perpetual non-call five year deal appealed to investors who are starved for yield at the moment — but who are also wary of taking on too much additional credit risk. Debt bankers say that investors are looking for opportunities to take on longer-term exposure or structural subordination to boost their returns, rather than buying the bonds of smaller companies without strong ratings.
ICBC Asia, a subsidiary of China's biggest bank, fit the bill. Parent bank ICBC is enormous, holding assets of around $3.4 trillion. ICBC Asia, for its part, is "the flagship of ICBC's overseas business" and benefited from a $1.65bn cash injection from its parent bank last year, according to a bank analyst.
These advantages allowed ICBC Asia to price the deal with little to no new issue premium. Bankers working on the deal set initial price guidance at the 4.5% area before tighening it to 12.5bp each side of 4.375%. The final pricing of the deal, which came at par, was set at 4.25%, according to a term sheet seen by FinanceAsia.
The closest comparable appeared to be ICBC's 6% perpetuals, which were trading at a cash price of 105.625, equivalent to a yield of 4.136%. But that deal becomes callable in December 2019, and has some structural differences. The most obvious is perhaps that it was issued by the parent bank, rather than ICBC Asia. But there are others.
For one thing, the point of non-viability — that is, the point at which the issuing bank is no longer considered to be viable, and therefore the bonds turn into equity — will be determined by the Hong Kong Monetary Authority on the new deal. The China Banking Regulatory Commission would make that decision for the outstanding deal, and may prove more accommodating given the sheer size of the bank and its importance to the Chinese economy.
The coupon step-up is also less generous on the new bond. If ICBC Asia does not call the new bond, the coupon will reset at Treasuries plus 313.5bp. The old bond would reset at 438.2bp over Treasuries, reducing the risk that the existing bonds would be extended.
Final demand came to $6.8 billion from 184 accounts.By geography there was split of 88% Asia and 12% Europe. By investor type, fund managers took 70%, followed by corporate and banks/brokers took 10% each, private banks 7% and insurance 3%.
Prior to the release of final statistics, bankers familiar with the transaction said fund managers and private banking accounts were the major buyers of the Baa1-rated Reg S transaction, and unsurprisingly Asia accounted for the bulk of the entire book.
The sale came after China Construction Bank issued its $3.05 deal in December last year, drawing an $11 billion order book after paying a new issue premium of between 10bp and 15bp.
ICBC Asia's perpetual bond will have a dividend reset on the fifth year to reflect the prevailing five-year Treasury yield plus a fixed 313.5bp spread, and every five years thereafter. The dividends can be canceled at the discretion of the bank on a non-cumulative basis subject to shareholder approval.
Joint global coordinators of the transaction were ICBC and Goldman Sachs, while Bank of America Merrill Lynch, Citi, Deutsche Bank, HSBC and UBS are joint bookrunners.
The story has been updated with final deal stats.
