Industrial & Commercial Bank of China (ICBC) nipped into the G3 bond markets on Tuesday with a $2 billion Basel III- compliant, Tier 2 bond deal.
The 10-year bullet transaction came on a subdued trading day for Asian G3 bonds with many investors sitting on the sidelines ahead of the US Federal Reserve’s meeting later this week, when it may decide to raise interest rates for the first time in a decade.
The one exception was SMC Power’s recent perpetual bond, which blew out almost four points as the result of a legal dispute with the Philippines government.
The muted trade flows meant that ICBC was able to pull in a final order book of just $3.6 billion for its deal. This was a far cry from the $28 billion order book it amassed for its debut additional Tier 1 (AT1) perpetual offering in December and the $7 billion order book China Construction Bank (CCB) managed to achieve for its $2 billion issue more recently in May.
Nevertheless, bankers said ICBC achieved its objectives and the two-day execution process gave investors time to put their lines in place.
“I’d say this result shows there’s robust demand out there and it’s definitely a good signal for the market and other issuers in the pipeline,” said one banker. “However, it will probably be the last Asian dollar deal before the Fed makes up its mind and there are definitely signs that non-Asian investors are really starting to scrutinise the China story and re-evaluate their positions.”
Trading differentials
ICBC initially went out with guidance around the 295bp mark before tightening it to 5bp either side of 280bp. Final pricing was fixed at 99.189% on a coupon of 4.875% to yield 4.979% or 275bp over Treasuries.
A total of 179 accounts participated of which 83% came from Asia, 10% from the US and 7% from Europe. By investor type, insurers took 37%, fund managers 33%, banks 20%, sovereign wealth funds 6% and private banks 4%.
Syndicate bankers said the BBB+/Baa3 rated deal offered a very slim concession to its nearest comparable – Bank of China’s 5% November 2024 deal, which has the same bullet structure and was trading around the 266bp level on a G spread basis at Asia’s close. The latter bond had widened about 3bp during the course of the Asian trading day.
“The curve from Bank of China’s November 2024 bond to ICBC’s September 2025 bond is worth about 5bp to 10bp,” the banked added. “So ICBC has priced flat to a few basis points over Bank of China.”
The two banks' secondary market trading levels do not show a consistent pattern. For example, Bank of China’s 2.625% May 2020 senior paper is trading at 140bp on a G spread basis, some 4bp tighter than ICBC’s 2.875% June 2020 senior paper.
But its existing old Tier 2 debt is trading about 20bp wider than ICBC without accounting for the nine-month maturity extension between its 5.55% February 2020 paper and ICBC’s November 2020 paper, which was trading Tuesday on a G spread of about 205bp.
Its AT1 paper is trading wider still at 40bp clear of ICBC’s 2049 bond, which is callable in December 2019 and is yielding about 4.895% compared to Bank of China’s 5.3% level.
Ahead of pricing, Mizuho fixed-income analyst Mark Reade calculated fair value for the new ICBC bond at 255bp over Treasuries, 20bp inside of where it priced. He said the deal “should perform well if it prices wide of that fair value level”.
Credit differentials
He added that his bank has a “generally favourable view on major Chinese banks’ sub debt based on our belief that China’s big four banks are among the most systemically important SOE’s anywhere in the world, which in turn translates into negligible write-down risk”.
In a sales note, Bank of China analysts also commented that final price guidance “looks about 10bp cheap” to their own bank’s November 2024 deal.
However, in a recent research note, JP Morgan fixed-income analyst Lim Soo Chong said that, while Bank of China is a moderately weaker credit than either ICBC or CCB, it is not enough to justify a spread differential.
In terms of capital, CCB has the strongest ratios of the three with a CET1 ratio of 12.35% at the end of June 2015 and an overall CAR of 14.7%. ICBC comes in second with a CET1 ratio of 12.13% and 14.17% CAR at the end of the first half.
Bank of China is last of the troika with a CET1 ratio of 10.63% and overall CAR of 13.69%.
ICBC’s recent interim results revealed that net profits increased 1% year-on-year to Rmb1.49 billion ($233.5 million) but so did NPLs, up 12.3% quarter-on-quarter to 1.4%. Special mention loans were one standout, up 31% compared to the second half of 2014.
However, Yuanta Securities argued that pressure on ICBC’s asset quality should ease in the second half as its rate of NPL formation is declining. It believes the bank’s risk control strategy will start to kick in during the first half of 2016.
According to Moody’s, ICBC had Rmb167 billion of old-style subordinated debt outstanding in June. On a year-to-date basis, Chinese banks have issued $48.2 billion in Basel III-compliant bonds according to data provider Dealogic.
New issue premium please
In offering a reasonable new issue premium, ICBC may buck the trend of recent deals, which have either priced aggressively and then traded slightly wide of their re-offer or, in the case of two recent deals, sunk very badly.
Sean Chang, head of Asian debt at Barings, told FinanceAsia that investors need a higher premium to compensate for Fed-induced uncertainty. Citing HSBC data, he said Asian credit yields have risen to 260bp over Treasuries from 220bp in June based on an average duration of 5.1 years.
Swire Pacific’s $500 million 10-year bond, which priced at 172.5bp on Monday, is a good example of a lack of any secondary market uplift. On Tuesday it opened a few basis points tighter at 169bp before ending the day wider on a bid offer spread of 175bp/172.5bp.
Chexim and SMC Power trading woes
Meanwhile, the Export-Import Bank of China’s (Chexim) $1 billion two-hander from last week has failed to pick up any steam at all despite the fact that many sales desks have been pointing out how cheap it now is. The five-year tranche is currently 13.5bp wider than its new issue spread of 130bp over Treasuries, while the 10-year is 15bp wide of its 160bp new issue spread.
The deal still appears to be suffering from the fallout of its primary market difficulties when it failed to garner momentum because of its unusual structure and questions about EMBI eligibility. It then got hammered in the grey market after it failed to be released for trading until later in the Asian morning.
Meanwhile, the woes besetting SMC Power’s recent perpetual bond from mid-August continue to deepen. The deal also struggled during the primary market and the Philippines' largest independent power producer ended up raising $300 million, less than the $500 million it had been targeting.
The perpetual non-call five deal was priced at par to yield 6.75%. After breaking syndicate, it immediately traded down to 98.657% and stayed around those levels until yesterday when it dropped to 92.193%, equating to a yield of 8.701%/8.447%.
The cause for the precipitous drop was a statement from the government’s Power Sector Asset & Liabilities Management Corp (Psalm) that it was terminating a MW1,200 project because an SMC Power subsidiary had failed to pay Ps6.46 billion in generation payments from December to April.
SMC Power has countered that the termination is illegal and Psalm has miscalculated the amounts due.
Syndicate
Lead managers for ICBC’s new Tier 2 bond are ICBC, Bank of America Merrill Lynch, Goldman Sachs, HSBC and UBS.
This article has been updated to include distribution statistics.
