* Ping An Bank sells 9 bln yuan in tier-2 capital bonds
* Chinese banks plan to sell up to 400 bln in 'Basel bonds'
* Banks need capital to absorb rise in bad loans
* But fund managers wary over lack of liquidity
* Limited demand from banks and insurers
By Gabriel Wildau
SHANGHAI, March 6 Ping An Bank Co Ltd
on Thursday became the first publicly listed
mainland Chinese lender to sell special loss-absorbing bonds,
but doubts linger about market demand for such debt, which give
investors reduced protection against failure.
China's bank regulator began phasing in new higher capital
adequacy requirements last year, in line with the global rules
known as Basel III.
Aggressive implementation of Basel III is a key element of
Chinese policymakers' plan to fortify banks against the risks
from a slowing economy, and the so-called "Basel bonds" are
designed to help China's banks withstand an expected rise in bad
China embarked on a massive credit-fueled economic stimulus
program from 2008 to 2010 in order to pull the economy through
the global financial crisis. Many analysts expect a large
portion of the bank loans extended during that time to turn
sour, with loans to local governments and industries suffering
from overcapacity a key source of concern.
While Ping An's current capital ratios are comfortably above
the minimum threshold, the mid-sized bank needs more capital if
it wants to expand lending in coming years without running afoul
of the rules. It is the the biggest mainland bank to have issued
"Basel bonds" so far. Two smaller, unlisted lenders had made
Ping An sold 9 billion yuan ($1.47 billion) in 10-year bonds
on Thursday at an average interest rate of 6.80 percent, in the
middle of its guidance range of 6.50 to 7.00 percent, according
to an announcement on China's main bond clearinghouse.
The yield compares to a risk-free benchmark of 4.52 percent
on 10-year Chinese government bonds and 5.63
percent on non-Basel bonds from a comparable bank, Shanghai
Purdong Development Bank.
CITIC Securities was lead manager on the Ping An deal, while
Guangfa Securities was joint lead.
Investors in "Basel bonds" demand a higher yield because
they are riskier than other forms of bank debt due to the "write
down" provisions that expose investors to losses if the bank
gets into trouble.
Though Beijing could be expected to rescue a failing bank,
in principle the China Banking Regulatory Commission (CBRC)
could force losses onto the bondholders via a write down before
offering funds for a bailout.
While Ping An's issue appeared relatively successful, market
watchers pointed out that the bank also relied heavily on sales
to its own wealth management clients, casting doubt on to what
extent the relatively low interest rate reflects market demand.
Chinese banks, including state-owned giants like Industrial
and Commercial Bank of China and China
Construction Bank , have announced plans to
sell as much as 400 billion yuan in so-called "Basel bonds" in
the next two years to boost their capital bases.
There are concerns that demand for all these issues will be
disappointing unless yields are sufficiently attractive.
"People are worried that the liquidity isn't very good,"
said Wang Ming, partner at Yaozhi Asset Management in Shanghai.
"But, based on the coupon rates, there's no obvious advantage
over other corporate bonds or financial institution bonds."
Liquidity is important for fund managers, who need to be
able to sell bonds quickly to meet redemptions.
Market watchers say that banks are the main investors in
"Basel bonds", with an unspoken understanding between banks that
banks will support one another's issuances.
"There's an element of shared interest among the banks. The
banks say to each other 'This time you buy mine, and next time
I'll buy yours,'" said Wang.
But there is a limit to how much help banks can provide each
other. CBRC rules limit banks investment in "Basel bonds" to no
more than 10 percent of their core tier-one capital.
At the same time, insurance companies, which are
traditionally among the biggest buyers of riskier long-term
bonds, have so far remained on the sidelines. That's because the
China Insurance Regulatory Commission has not yet issued rules
permitting insurers to buy "Basel bonds".
Chinese regulators have traditionally only permitted banks
to use equity and retained earnings to shore up their capital
buffers. Capital adequacy is a key measure of a bank's ability
to absorb losses from loan defaults, interest-rate swings, and
other kinds of risk.
But along with the demand for higher capital levels under
Basel III, Chinese regulators for the first time have also
permitted banks to issue hybrid securities with characteristics
of debt and equity.
In addition to "Basel bonds", regulators are also preparing
rules to allow banks to sell preferred shares.
Ping An's "Basel bonds" qualify as tier-2 capital under the
CBRC's rules, while only equity and retained earnings qualify as
Ping An's total capital adequacy ratio, including tier-1 and
tier-2, stood at 9.93 percent at end-September. CBRC's phase-in
schedule for the new capital adequacy requirements calls for
mid-sized lenders to meet a ratio of 8.9 percent by the end of
this year and 10.5 percent by end-2018. The requirement for the
biggest banks is one percentage point higher.
($1 = 6.1282 Chinese yuan)
(Editing by Simon Cameron-Moore)