August 15, 2016 / 7:06 AM / 3 years ago

China Life set for hybrid return

HONG KONG, Aug 15 (IFR) - China Life Insurance Co Ltd is in discussions with bankers to issue its second US dollar subordinated bond, raising hopes that Asia’s growing insurance sector will become a major source of hybrid securities.

The offering, which may come as early as next month, leads a burgeoning pipeline of capital raisings in a year when subordinated offerings from Asia’s banks have been largely disappointing.

Bankers say South Korea and China are set to be the key markets for new deals, as recent and upcoming regulatory changes drive more insurers overseas to boost their regulatory capital.

“We’re definitely interested in these markets, and there could be some good growth,” said a senior Hong Kong-based debt capital markets banker. “It will come slowly at first, but, once some new deals hit the market, others will follow.”

The China Insurance Regulatory Commission (CIRC) published updated rules on its China Risk-Oriented Solvency System, known as C-ROSS, in February last year, with the aim of encouraging insurers to pursue more equity-like hybrid securities to boost capital ratios. The rules went into full effect in January.

In June 2015, China Life became the first insurer to print an offshore hybrid under the new regime, with a $1.28 billion Core Tier 2 extendible 60-year non-call five, priced at 4%.

Orders hit as much as $7 billion before settling at $5.4 billion. The bonds were bid as low as 95.050 in January this year, but now hover around 101.725, according to Tradeweb.

The C-ROSS regulations, as well as a large amount of maturing sub debt, are expected to encourage more capital transactions. However, most of this will be done onshore as rates are far cheaper.

Chinese insurers have 60 billion yuan ($9.0 billion) of onshore subordinated debt either callable or maturing this year and another 70 billion yuan in 2017, according to analyst estimates. There could also be a few offshore transactions from insurers looking to fund overseas businesses and diversify their investor bases.

Bankers and analysts expect China Life to issue another US dollar Core T2, but there is considerable speculation that the offering could be in a new form of preference shares, currently under CIRC consultation, which would rank junior to all other forms of debt.

As China’s biggest insurer, in terms of market value, China Life would be an appropriate issuer to test the market, as it was for its Core T2 print last year.

“Right now, there is a consultation going on for issuing preference shares,” said Sally Yim, senior vice president, financial institutions group at Moody’s. “I wouldn’t rule out the possibility of a preference share issue coming out. We still have to wait for the final regulations to come, but the requests for comments were put out over a year ago.”

An investor relations official at China Life declined to comment. KOREA CALLING While the majority of primary activity in China’s insurance sector will likely remain onshore, bankers believe there could be a better opening for offshore issuance from Korea.

The country’s insurers will soon have to meet the IFRS 4 Phase II standards, which are new and tougher accounting rules related to the calculation of their liabilities. Under these standards, liabilities will be measured on market values, as opposed to book values.

Although the regulation will not be fully in place until 2020, it is believed companies will begin preparing for the rules before the end of this year.

“I think there will be more traction out of Korea than anywhere else in Asia,” said a senior Singapore-based FIG banker. “The insurers are going to need more capital and we hear that some want to be fully compliant by 2018.” (Reporting by Spencer Anderson; Editing by Steve Garton)

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