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Sept 29 Compania Levantina de Edificacion y Obras Publicas SA :
* ICBC raises US$3.2bn of Tier 2 capital in domestic market
* Subordinated bond is first from China's big five banks
* Local Triple A ratings ignore "bail-in" risk
By Lianting Tu
SINGAPORE, Aug 6 (IFR) - China threw open the doors to the world's biggest market for so-called "bail-in" bonds this week with a landmark subordinated bond from the country's top bank.
Industrial and Commercial Bank of China, the world's largest bank by assets, priced a Rmb20bn (US$3.2bn) Tier 2 bond on Tuesday. The domestic offering is the first from one of China's top five banks since it began the transition to Basel III standards at the start of 2013.
After a long wait, ICBC's deal promises to unblock a heavy pipeline of capital raisings as China's biggest banks replace maturing securities and shore up their capital to keep pace with quickening credit growth.
The top five banks have announced plans to raise a combined US$43.5bn of Tier 2 capital by the end of 2015, split between onshore and offshore markets. Bank of China said it would raise Rmb30bn of Tier 2 capital in a similar onshore transaction this Friday, suggesting those deals are likely to arrive sooner rather than later.
Bankers believe the arrival of the first domestic offerings from ICBC and BOC show that China's regulators have overcome any lingering doubts over the structure.
ICBC first applied for the Tier 2 issue late last year but obtained regulatory approvals only recently.
Aside from wanting to prevent several giant deals from draining market liquidity, regulators were taking time to grant approvals so they could design a uniform Basel III-compliant format for the top banks to follow, a Singapore-based senior debt capital markets banker said.
"For the same bank to issue onshore and offshore capital instruments, the regulators want to make sure onshore and offshore investors get equal treatment," the banker said.
China's big banks have lagged their peers in introducing Basel III-compliant capital securities, often dubbed "bail-in" bonds in Europe, since holders are typically wiped out to limit the use of public money in a government bail-out.
About 10 smaller Chinese banks have issued (Rmb106bn) US$17bn of Tier 2 bonds onshore this year, and overseas issues have been rare, with only about US$1bn of Chinese bank capital outstanding offshore that complies with the latest Basel rules.
The amount raised by China's larger banks is disproportionally small to compared with the more than US$32bn in Basel III securities raised by Asian banks (ex-Japan and ex-Australia). That includes US$26bn issued so far in 2014 in both the local and international markets, according to Moody's data.
ICBC's Hong Kong unit sold a US$500m Basel III bond last year and a Rmb1.5bn offering of offshore renminbi Basel III bonds In 2011. China Citic International, Citic Bank's Hong Kong unit, sold a US$350m Basel III-compliant Additional Tier 1 offering earlier in November 2013.
"It is difficult to put a number for the expected [Basel III-compliant] issuances from major Chinese banks this year, but we expect a few mega-deals in the offshore market," said Krishna Hegde, head of credit research at Barclays.
In addition to ICBC and BOC, the other three major state-owned banks - Agricultural Bank of China, Bank of Communications and China Construction Bank - also have announced plans to issue Tier 2 bonds by the end of next year in both domestic and international markets.
ABC has announced plans to sell Rmb50bn of Tier 2 securities, BoComm will sell Rmb40bn and China Construction Bank will sell Rmb60bn. ICBC, meanwhile, plans to sell a total of Rmb60bn, as does BOC. All that makes for a total of Rmb270bn in new-style bank capital bonds that are expected to hit the markets - more than from any other single country.
According to China Central Depository & Clearing, a state-owned clearing house for onshore bonds, Rmb93bn of old-style subordinated bonds from commercial banks will come due in the next year. Most of these bonds will need to be replaced with new-style Tier 2 bonds.
For the securities to qualify as bank capital in China, holders will face losses if the China Banking Regulatory Commissions deems the bank selling the securities is no longer viable, or if the CBRC determines the lender needs government support to survive.
TRIPLE A RATING
ICBC's recent offering is rated AAA by Chengxin, a Moody's joint venture in China, while Bank of China's proposed deal is rated AAA by Dagong Global Ratings.
Such a high-quality rating on subordinated debt is unusual in international markets, as most major global rating agencies rate Basel III-compliant Tier 2 bonds two notches lower than the borrower's standalone senior credit ratings. One notch reflects the subordinated nature of the bonds and another reflects the fact the bonds are designed to absorb losses.
ICBC is 70.3%-owned by the government, however, so onshore investors equate the risk of ICBC bonds with China sovereign risk and pay little attention to the loss-absorption clauses, according to a Shanghai-based bond analyst. No Asian regulator has yet enforced such a clause.
Moody's has assigned ICBC an adjusted standalone credit rating of Baa2. Two notches from that would be Ba1, putting the Tier 2 securities below investment grade.
The Triple A rating reflects the onshore rating agency's perception that the creditors may not need to take a haircut if the bank fails. This thinking runs counter to the underlying intention of Basel III regulations, which is to ensure creditors share the pain of a bank failure.
"Domestic investors believe the nation's largest bank will never fail," said the Shanghai-based bond analyst. "For many, ICBC is the government and they would not question the bonds' Triple A rating."
Still, the fact domestic and international agencies have different standards is confusing to market participants, the Singapore-based debt markets banker said.
"It is a point of frustration as there is no uniform approach [by rating agencies]," the banker said.
That may be especially true since the point of non-viability language governing loss-absorbing Tier 2 bonds in China so far is relatively unfriendly to investors, compared with similar bonds issued by Singaporean banks, for instance, where the bonds may only be partially written off.
"The important thing is whether the rating of the subordinated bonds should be lower than the bank's senior bond rating," said Ritesh Maheshwari, managing director for financial services ratings, Asia Pacific at Standard & Poor's.
"Obviously Tier 2 bonds carry higher risk," Maheshwari said. (Reporting by Lianting Tu. Editing by Steve Garton and Abby Schultz.)
Sept 29 Compania Levantina de Edificacion y Obras Publicas SA :
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