Wednesday, 12 December 2018

Asia Bond: Bank of China’s Rmb40bn AT1 preference share issue

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In a year when bank capital securities took centre stage in Asia, the first Additional Tier 1 offering from mainland China proved the most ambitious, and the most significant.

Bank of China faced the daunting target of raising Rmb40bn (US$6.5bn) in the offshore markets with an issue specifically designed to comply with loss-absorption rules under Basel III – at the time an untested concept in Asia.

Adding to the challenge, China’s regulations require all bond issues to have a maturity date, meaning that the deal had to be structured as a callable preference share, rather than a perpetual bond issue – even though that meant some fixed-income investors would not be able to buy the securities. Authorities also insisted on a renminbi denomination and a private placement format, with no more than 200 investors, while the customary lengthy approval process limited the bank’s ability to time the market.

Bank of China International, the global co-ordinator, set out to de-risk the deal by sounding out investors well ahead of pricing. By the time books officially opened on October 15, with regulatory approvals in place and national holidays out of the way, the deal was already largely pre-sold, with anchor orders totalling US$4.5bn–$5bn, giving the bank the confidence it needed to go ahead.

In the end, the world’s largest issue of contingent convertible capital was priced on a night of the most extreme volatility in two years, and the fact that such a big deal traded well impressed many observers.

The yield of 6.75% was in the middle of the 6.5%–7.0% that BOC had indicated when it was talking to investors in the months before bookbuilding. That was too tight for many European investors, but other market participants saw it as a sensible price that left some value on the table for investors prepared to support the pioneering trade.

The strategy worked. The pref shares traded slightly above par on the break, while most Asian credits were widening on a tumultuous day as 10-year US Treasury yields tumbled 35bp at one point and the Dow Jones Industrial Average plunged 300 points.

Allocations were a closely guarded secret even within the syndicate, but the deal’s performance made it clear that BOC had managed to identify investors to hold for the long term.

The AT1s traded up as more investors became comfortable with the product, finishing at a yield of 6.07% on November 14 and paving the way for future deals in an asset class that is already becoming too big to ignore.

BNP Paribas, China Merchants Securities (HK), Citigroup, Citic Securities International, Credit Suisse, HSBC, Morgan Stanley and Standard Chartered joined BOC on the books.

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