State-owned Postal Savings Bank of China (PSBC) raised $7.25 billion in its first ever US dollar denominated bond sale on Thursday night, in what was the world’s largest additional tier-1 (AT1) offering.
The lender broke a number of records. The Reg S is the largest dollar bond offering by an Asian issuer since Alibaba’s $8 billion multi-tranche deal in November 2014, although some bankers argue that the latest debt issuance carries more weight than that of the e-commerce company because it is single-tranche deal.
According to Dealogic, the PSBC transaction surpassed ICBC's renminbi-denominated AT1 bonds in November 2015 as the largest bond ever issued at the lowest level of seniority. Banks worldwide have been issuing AT1 bonds, a type of hybrid security, under regulations introducted in the wake of the 2008 financial crisis. Such instruments can, if the bank's capital levels fall below specified levels, be converted to common stock or even written off entirely by regulators.
For investors, this means healthy yields, in return for increased risk.
PSBC says the debt sale helped improve its capital buffer and would support expansion. Its capital adequacy ratio improved to 11.67% in June from 11.13% in December, but its overall capital buffers and profitability lags other, larger state-owned banks.
In terms of financing costs, the final pricing of the dollar bond deal represents the lowest yield paid by a Chinese lender in the AT1 format and the tightest spread, which bankers said reflects the search for yield in the market, according to bankers working on the transaction.
“From what we heard, there was a lot of real money players behind the Postal Savings Bank deal,” a Hong Kong-based fund manager told FinanceAsia. “The demand for bonds has been so great in the past few years that people have overlooked fundamentals and credit rating,” the fund manager added, citing S&P’s downgrade of China’s sovereign credit by one notch from AA- to A+, the first time since 1999.
Sounding a more cautious note, the fund manager added: "Once the tide changes we will see more credit differentiation.”
Fixed-income investors seemed to have overlooked S&P's decision. PSBC, rated A2/A/A+ by Moody’s/S&P/Fitch, garnered more than $13 billion of orders from offshore investors, building one of the largest orderbooks this year.
On Thursday morning, initial guidance of the perpetual non-call five year bond was pitched at a yield in the region of 4.85%, before tightening to 5bp each side of 4.55%. Final pricing of the bond was fixed at par to yield 4.5%, without paying any new concessions to investors.
Bankers used ICBC Asia’s outstanding AT1 paper as a pricing benchmark, given the similar size and credit profile. The perpetual bond, which is callable in December 2019, was trading on a cash price of 104.5 to yield 3.827% on Thursday morning.
They also picked Bank of Communications’ AT1 note as a second reference. The bond, which is callable in July 2020, was trading on a cash price of 102.25 to yield 4%.
“Taking a 2.5 times multiple between AT1 and senior bank note among the state-owned banks in China, the fair value of Postal Savings Bank’s debut issue should be at 4.5%,” a banker told FinanceAsia.
In the secondary market on Friday morning, the bond was traded a tad lower, at a cash price of 99.5 to yield 4.614%.
The coupon for the Basel III-compliant note is fixed for the first five years. If the bank decides not to redeem the bond in year five, the coupon will be reset on the first call date and every subsequent five years to the prevailing five-year US treasury yield plus a fixed margin. There is no step-up.
PSBC said in August it planned to raise $785 million through a Shanghai listing, following a Hong Kong listing last year that raised $7.3 billion, the world's largest IPO of the year.
PSBC plays a unique role in China’s banking system due to its vast retail networks and extensive coverage of small businesses even in the countryside. The bank serves more than 50,000 clients through its 40,000 outlets and branches, making it one of the largest wholesale banks in the country, according to its official website.
Joint global coordinators were CICC Hong Kong, Goldman Sachs Asia, JP Morgan, UBS, Morgan Stanley, Bank of America Merrill Lynch, ICBC Asia, Haitong International, HSBC and DBS. Joint bookrunners were CCB International, Citic CLSA Securities, Ping An of China Securities Hong Kong, Standard Chartered, Huarong Financial, BOC International, China Merchants Securities Hong Kong, Crédit Agricole CIB, Deutsche Bank, ABC International, SinoPac Securities Asia and ICBC International.
