January 25, 2019 / 1:38 PM / a month ago

UPDATE 1-Central bank support boosts Bank of China perp bond sale

* Bank issues 40 bln yuan of perpetual bonds at 4.5 pct

* Yield comes in at low end of expectations

* Bid-to-cover ratio “more than 2” - PBOC

* Loosened restrictions on insurers, CBS support issuance (Recasts, adds PBOC statement, background and analyst comments)

By Andrew Galbraith

SHANGHAI, Jan 25 (Reuters) - China’s fourth-largest lender on Friday issued the first-ever perpetual bonds by a Chinese bank, with yields at the low end of market expectations after new policies to support their issuance boosted market interest.

The bond issue by Bank of China Ltd comes amid a push by policymakers to bolster lending as credit gauges hover near record lows despite attempts to step up support for a slowing economy.

Perpetual bonds, or “perps” are seen as a major step toward recapitalisation of banks held back by inadequate capital.

Bank of China sold 40 billion yuan ($5.92 billion) worth of perpetual bonds on Friday at a yield of 4.5 percent, sources with direct knowledge said.

In a statement later on Friday, the People’s Bank of China (PBOC) confirmed the yield and said the bid-to-cover ratio was “more than 2”. More than 140 investors, including insurance companies and some offshore institutions, subscribed to the issue, the central bank said.

The issuance “could raise Bank of China’s tier-one capital adequacy ratio by 0.3 percentage points,” the PBOC said.

In a statement, Bank of China said that the bond’s external rating was triple A.

A source previously told Reuters the bonds would likely be priced within a range of 4.5 percent to 5.2 percent. Last week, the bank was given permission to issue up to 40 billion yuan of the non-fixed-term bonds.

Earlier market concerns about the instruments were soothed after the PBOC said Thursday it would establish a central bank bill swap (CBS) tool to improve the bonds’ liquidity, and encourage banks to replenish capital through perp issuance.

Higher-rated perps will also qualify as collateral for the PBOC lending facilities.

“This issuance was supported by the central bank, it was certain to be successful,” said a Beijing-based analyst who asked not to be named as he is not authorised to speak with media.

Also on Thursday, the China Banking and Insurance Regulatory Commission (CBIRC) said it would allow insurance institutions to invest in tier-2 capital bonds and perps issued by banks.

Previous restrictions had prevented insurance firms from purchasing capital instruments with unfavourable write-off provisions, like perps.

“The creation of CBS implies a ‘hidden guarantee’ by the central bank for qualifying banks, creating a credit link between qualified banks’ perpetual bonds and central bank notes,” analysts at China Merchants Securities said in a note.

Banks would face “markedly lower” difficulty and costs issuing perps as a result of CBS, they said.

But Everbright Securities analysts noted that while CBS alleviates liquidity issues facing investors in perpetual bonds, the credit risk of the bonds is still borne by commercial banks.

“Transferring risk to the PBOC could give rise to moral hazard and at the same time disrupt market pricing mechanisms,” they said.

Beijing’s multi-year campaign to crack down on financial risks and shadow banking activity has increased the urgency for banks to recapitalise. Lenders must now bring off-balance-sheet loans onto the books and set aside more capital buffers to provision against rising bad debt in a slowing economy.

While Bank of China is the first Chinese bank to issue perps, it is not the first Chinese company to do so.

Power producer GD Power Development Co Ltd issued 1 billion yuan worth of the first Chinese perpetual bonds in 2013. Since then, Chinese firms have issued nearly 1,300 perpetual bonds worth a total of more than 1.3 trillion yuan, according to Refinitiv data.

$1 = 6.7578 Chinese yuan Reporting by Andrew Galbraith and the Shanghai Newsroom; Editing by Andrew Cawthorne

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