* Banks line up first loss-absorbing bonds
* Deals will test appetite for new style subordinated debt
* Other lenders in Asia may follow template
By Kit Yin Boey
May 23 (IFR) - Malaysia is poised to host Asia's first
public issue of loss-absorbing bank debt, so-called bail-in
bonds, since the region began the transition to Basel III
standards earlier this year.
CIMB Bank has received preliminary approval from the
country's central bank for a subordinated ringgit bond that will
count towards its Tier 2 capital, and may launch the deal in the
next few weeks. There is also talk that another local lender,
Public Bank, will follow suit with a similar Basel III compliant
If the deals materialise in the coming weeks, they promise
to set a template as the first in Asia, excluding Japan and
Australia, since regulators from India to China introduced Basel
III rules in January.
Under the new, stricter capital requirements, subordinated
bonds require loss-absorption features if they are to count
towards a bank's capital ratios, ensuring that holders are
"bailed in" through writedowns or conversion to equity before
any public funds are used to bail out a bank.
Given their fairly well capitalised levels, Malaysian
bankers had not expected a Basel III-compliant structure to hit
the markets so soon. CIMB, however, is in talks to buy
Philippines-based Bank of Commerce for an estimated US$296m,
which may have hastened its plans to raise bank capital.
"No bank wants to be the first, since they will have to
cough up a lot more to compensate the investors for that
write-off feature, and there is really no proper benchmark or
comp in the Asian markets," said one rival banker.
Asia's first Basel III-compliant bond dates back to November
2011, when Hong Kong-based ICBC Asia priced a Rmb1.5bn (US$236m)
Tier 2 Dim Sum bond that will write down to zero if the bank
becomes non-viable. That issue, however, came at a time of
surging enthusiasm for renminbi exposure, and investors also
assumed - rightly or wrongly - that there was little chance of
ICBC Asia's state-owned parent allowing the unit to fail.
More clarity has since emerged on local interpretations of
Basel III rules, but no Asian lender has yet followed ICBC
Asia's lead with a public sale.
A small Chinese lender is also working on the first
loss-absorbing Tier 2 bond in the country's restricted domestic
market, but a deal in Malaysia would offer a more representative
benchmark for the wider region.
Banks across Asia have until now held back from replacing
their old-style Tier 2 debt, in part due to concerns over the
cost of doing so.
Australia's Suncorp in April sold the country's first retail
Tier 2 to comply with the new rules. The 10.5-year non-call 5.5
notes had a successful run in the yield-driven retail investor
market, allowing Suncorp to pay a premium of just 85bp-90bp over
old-style Tier 2 notes from the Australian major banks.
In Malaysia, investors are looking for a Basel III-compliant
Tier 2 issue to pay a yield of 6%-7% to offset the increased
risk of losses. That would be 200bp-300bp above outstanding
old-style Tier 2 paper. For instance, Public Bank's Tier 2 notes
due August 2022 and callable in 2017, were trading on Tuesday at
"The loss-sharing feature means that, in effect, I'm buying
a hybrid convertible," said one local investor. "If there is
little upside for me, I would think they will have to pay much
higher than hybrid Tier 1 notes. And that will also depend on
what options they provide for investors to exit."
CIMB, however, will be hoping for a good response from
investors, who have been starved of new issues since March when
the primary market ground to a halt ahead of a general election.
Investor confidence has returned with the incumbent government,
but there has only been one public deal since the elections on
May 5 - a M$1.615bn multi-tranche project financing sukuk from
If it does get a warm reception in the Malaysian market,
CIMB may even set a positive precedent for other banks in the
country, and the region, to follow.
As well as setting a benchmark for pricing, CIMB's issue
will provide more clarity on the structures that are acceptable
- to both regulators and investors.
Banks in the region had been waiting for regulators to
outline, among other things, what exactly makes a bank no longer
viable - the trigger point for subordinated bonds to be
written-off or converted into shares.
The Basel Committee has guidelines for those so-called
triggers, but banks and investors would rather wait until they
are endorsed by the local regulators that will have the final
say in each case.
Bank Negara Malaysia, the country's central bank, has not
set any threshold levels as a trigger event for non-viability
for Tier 2 issues, but Tier 1 investors will suffer losses if a
bank's common equity falls below 5.15%. In the case of both Tier
1 and Tier 2 issues, however, the final decision on whether an
issuer is viable will be made by Bank Negara on a case-by-case
Bank Negara requires all banks to have core equity Tier 1
capital ratio of 4.5%, a Tier 1 capital ratio of 6.0% and a
total capital ratio of 8.0% by January 2015.
Banks in Malaysia are fairly well capitalised at the moment.
They would be able to suffer a 300% rise in non-performing loans
without common equity Tier 1 falling below 7%, Moody's said in a
That means CIMB and Public Bank will probably not be soon
followed by many local peers. They will, however, help the whole
region break the taboo around loss-absorbing bonds.
(Reporting By Kit Yin Boey; editing by Christopher Langner and