In a year when bank capital securities took centre stage in Asia, the first Additional Tier 1 offering from China proved the most ambitious, as well as the most significant.
Bank of China faced the daunting goal of raising Rmb40bn (US$6.5bn) in the international markets with an issue specifically designed to comply with loss-absorption rules under Basel III – an as-yet untested concept in Asia.
To add to the challenge, China’s regulations required all bond issues to have a maturity date, meaning that the offering had to be structured as a callable preference share, rather than a perpetual bond, even though it 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 sound out investors well ahead of pricing in order to de-risk the issue. When books officially opened on October 15, with regulatory approvals in place and national holidays out of the way, the issue was already largely pre-sold with anchor orders totalling US$4.5bn–$5bn, giving the bank the confidence it needed to proceed.
In the end, the world’s largest issue of contingent convertible capital priced on a night of the most extreme volatility in two years, and the fact that such a big deal traded well confounded many sceptics.
The yield of 6.75% was in the middle of the 6.5%–7.0% that BOC had indicated when it sounded investors during the months preceding official bookbuilding. That was too tight for many European investors, but other market players 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 when most Asian credits widened in 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 issue’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 IFR’s review period 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 BOCI on the books.
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