ICBC pays up for record low AT1

IFR Asia 1205 - 18 Sep 2021 - 24 Sep 2021
5 min read
Emerging Markets, Asia
Daniel Stanton, Carol Chan

Industrial and Commercial Bank of China, rated A1/A (Moody's/S&P), paid up to maximize size with a US$6.16bn Additional Tier 1 capital bond offering, but still achieved the lowest ever offshore AT1 yield from greater China.

The transaction, the first offshore AT1 capital issue from a PRC-incorporated bank this year, was also the largest single-tranche offering from Asia in the past four years.

The perpetual non-call five Basel III-compliant AT1 was priced on Thursday at par to yield 3.2%, 45bp tighter than initial price guidance of 3.65% area.

The yield was the second-lowest AT1 yield in Asia and the lowest-ever yield globally for an AT1 in the same rating range.

Shinhan Financial Group set the lowest Asian AT1 yield in May when it issued US$500m sustainability perpetual non-call five AT1 notes at 2.875%. The Shinhan AT1 is rated Baa3 by Moody's, a notch higher than the expected Ba1 rating for ICBC's notes.

“It was a landmark transaction for ICBC and China in many ways, being the only Chinese bank capital deal this year, and also the first time in almost a year that ICBC has issued in offshore markets,” said Adrian Khoo, co-head of Asia debt capital markets, loans and acquisition finance at Citigroup, one of the leads on the deal.

“Investors continue to show strong demand for top grade names like ICBC, even though there are challenging conditions in other sectors,” he said.

Global AT1 yields lower

Despite the record pricing achieved, which reflecting the global trend for new low yields for AT1s and preference shares in countries like India, Thailand and the US, ICBC appeared to pay up for the size.

It sounded out to the market that it was aiming for a similar size to last September’s US$2.9bn AT1 issue at the beginning although it stressed that it had the flexibility to issue more. Nomura's trading desk in a note said that ICBC was looking to print at least US$4bn–$5bn this time.

Ultimately, ICBC used up the full quota of Rmb40bn-equivalent it had obtained from the banking regulator, far exceeding expectations.

Another banker on the transaction said ICBC's strategy this time was different from last year, when it printed its AT1 in preference share format.

Last year it aimed for a bigger size and lower coupon than Bank of China's US$2.82bn 3.6% AT1 issued in February 2020, but this time, it wanted to maximize the size and was willing to offer a premium, according to the banker. He suggested that the premium paid was about 40bp–45bp over fair value.

ICBC's 3.58% AT1, callable in September 2025, traded at a yield-to-call of 2.605% ahead of the release of initial guidance. BOC's 3.6% AT1, callable in April 2025 and Bank of Communications' 3.8% AT1, callable in November 2025, were quoted at 2.449% and 2.78%, respectively. Citic Bank's Hong Kong unit China Citic Bank International's 3.25% AT1, callable in July 2026, was seen at 2.977%.

Research firm CreditSights put fair value for the new issue at 2.875% and Nomura's trading desk at 3%–3.1%.

Rich premium paid

"The IPG level was about 100bp wider than the secondary, which in some sense demonstrated its stance that it is willing to offer a rich premium to have a maximum size," said the banker.

The strategy seemed to work well, with orders peaking at US$9.2bn. This was one of the largest order books for any Asian financial institution, with orders from a good mix of asset managers, corporates, insurers and quasi-sovereign accounts.

Final statistics were not available at the time of writing.

This was ICBC's first offshore AT1 in perpetual format, and will be permanently written down if regulators deem the bank to be non-viable.

The first AT1s from Chinese banks were sold as preference shares, as there was no way to sell undated notes, but since regulators in 2019 allowed them to sell perpetual bonds this format has become popular. BoCom's US$2.8bn deal in November last year was the first Chinese offshore AT1 in perpetual format.

Early Chinese preference share AT1s had a hard trigger, converting them into equity when a bank’s core Tier 1 ratio dropped to the 5.125% trigger level. ICBC’s issue last year did not have the 5.125% hard trigger, though it did have equity convertibility.

Nomura said the new perps should trade 25bp–35bp back of last year's pref share issue, since the previous issue resets to a spread of 330bp over five-year Treasuries if not called, compared with 236.8bp for the new notes.

The new AT1 traded up in the secondary market on Friday, quoted at 100.7/100.8.

ICBC (Asia) was sole financial adviser as well as joint global coordinator, joint lead manager and joint bookrunner with Citigroup, HSBC, JP Morgan and Mizuho. BOC International, Commerzbank, Credit Agricole, ICBC Standard Bank, Natixis and UBS were JLMs and JBRs.

Fixes typo