Bank of China’s US$6.5bn offering of Additional Tier 1 capital in November 2014 remains the largest international bond from a Chinese borrower.
China’s internationalisation has transformed Asia’s debt markets in recent years, with countless jumbo financings from mainland issuers and a steady flow of Chinese money heading offshore. Bank of China’s AT1 was far from the first big deal from the country, but it marked a turning point in the scale of what was possible.
When Chinese regulators set the agenda for Basel III-compliant issuance, there were plenty of questions about the extent of demand for the structure.
Loss-absorption rules under Basel III were at the time an untested concept in Asia, and capital rules meant the format was off-limits to Chinese banks – major buyers of other Chinese credits.
Bank of China also needed a massive Rmb40bn (US$6.5bn-equivalent back then).
Preparatory work took a full year, and bankers spent months ahead of the formal launch educating investors about the new product. One of the first decisions was whether the deal should be handled by equity or debt capital markets teams, since Chinese regulators had settled on preference shares as the AT1 format.
Moreover, Chinese authorities insisted on a renminbi denomination and restricted with no more than 200 investors. To comply with the requirements, the notes settled in US dollars at a fixed rate of Rmb6.1448, while primary allocation was controlled to fewer than 200 accounts.
The yield of 6.75% was too tight for many European investors, but other market participants saw it as a sensible price given the state ownership. Anchor orders had covered the deal size ahead of the release of initial price guidance.
The Reg S deal came out with final orders of US$21.8bn with investors including insurance companies, sovereign wealth funds, pension funds, asset managers and private banks. Asian investors dominated, but syndicate bankers stressed that the deal was not especially reliant on China.
Fund managers who did put in an order were well rewarded as growing acceptance of the format pushed up the price. But more importantly, the deal set a template for the rest of China’s financial sector to follow.
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