Asian Basel III benchmark disappoints
(This story was originally published in IFR Asia, a Thomson Reuters publication, on October 5.)
* ICBC Asia sells first new-style subordinated debt in dollars
* Bonds widen 20bp in first day of trading
* Institutional investors demand more premium for risks
By Neha d'Silva
HONG KONG, Oct 7 (IFR) - Asia's first benchmark issue of loss-absorbing bank capital ended in finger-pointing last week, underlining the challenge of determining the correct price for subordinated debt under the Basel III regime.
Industrial and Commercial Bank of China (Asia), the Hong Kong subsidiary of China's biggest bank, sold Asia's first public issue of Basel III-compliant bank capital in US dollars last Thursday, raising US$500m from a 10-year non-call five Tier 2 bond.
Despite a long marketing effort designed to determine the correct clearing price for the new structure, the deal drew a disappointing response from institutional investors, and many funds dropped out as price guidance was tightened. After a big allocation to private banks, the bonds struggled in secondary on Friday, slipping from 315bp over five-year US Treasuries at re-offer to as wide as 336bp.
Bankers among ICBC's 11-strong bookrunner group blamed each other for pushing the final price too tight, while fund managers said institutional investors ended up with more bonds than they had expected.
Private banking investors bought 45% of the notes. Only 30% went to fund managers.
"The price was tight," a Singapore fund manager said on Friday. "There were a few institutional investors who followed their heart and went for it and are selling now. They should know better and demand price. I think it has set a good precedent."
A handful of Asian issuers have sold Basel III-compliant capital securities at a tight price in local currencies - including ICBC Asia in the offshore renminbi market two years ago - but last week's deal marked the first public issue in US dollars.
The response shows that institutional investors continue to hold out for a higher premium in return for the new loss-absorbing features required under Basel III - even if the risk of ICBC failing may be extremely remote.
ICBC Asia's bonds will write down to zero if the People's Bank of China declares the parent company to be no longer viable or if the Hong Kong Monetary Authority deems the Hong Kong unit to be non-viable.
Bonds with such language in Europe have been pricing with premiums ranging from 100bp to 150bp over old-style subordinated debt, which did not include loss absorption.
The key comparable for the deal was ICBC's old-style Tier 2 bonds due 2020, which were trading at 160bp over US Treasuries, or a G spread of 216bp. That suggested if ICBC Asia had done an old-style Tier 2, the fair value for the new security would be about 250bp.
On that logic, the new issue offered about 65bp for the loss-absorption features and the new issue premium.
Fund managers clearly wanted more.
Order books swelled to US$500m within 30 minutes after the leads set initial price thoughts of the mid-300bp area over five-year Treasuries on Thursday morning, and syndicate bankers reported a total book of US$2.3bn from 150 investors.
Many funds fell away, however, once guidance was set at 315bp-325bp, a move that some bankers attributed to the bloated syndicate structure.
ICBC, Citigroup, Deutsche Bank, HSBC and UBS were global coordinators, and joint bookrunners alongside ANZ, Bank of America Merrill Lynch, Credit Agricole, Credit Suisse, Goldman Sachs and RBS.
"When you have too many cooks, no one can agree on the sauce," said one banker.
"Institutional investors had pricing limits. Some of them saw value at a wider spread. At the final terms of the deal, the less price-sensitive investors were arguably the private banks," said another banker close to the deal. "There was no conscious decision to privilege investor base one over the other."
Previous loss-absorbing bank capital issues in Asia's local currencies have been dominated by private banking clients, who are typically less price-sensitive than institutional investors. UOB, for instance, placed 74% of its S$850m (US$670m) Tier 1 securities to private banks in July.
ICBC's experience again underlines the gulf in pricing expectations between wealthy local individuals and institutional investors.
In the past few months, banks in India, Malaysia, Singapore and Australia have all issued Basel III compliant capital bonds in the local market. Most of these deals offered very small premiums compared to the secondary levels of their outstanding old-style paper, which did not include loss-absorption features. (Reporting By Neha d'Silva; Editing by Christopher Langner and Steve Garton)
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