BoC's AT1: big but not that clever
You’ve got to hand it to Bank of China. This week it priced the biggest Basel III bank capital deal ever, in what bankers are calling the worst market conditions since 2008. But while the deal was certainly one step forward for Bank of China, it looked like two steps back for the international capital markets.
The first of its kind — and a landmark for that reason — Bank of China's $6.5bn additional tier one (AT1) offering this week has been widely seen as the benchmark for the rest of the big four Chinese banks. It has certainly shown that enormous volumes can be done, but only in a very particular, very China focused way.
In many ways this was a clash of cultures, not only in terms of how investors viewed the pricing — international investors saw it as an expensive CoCo, Chinese accounts saw it as cheap sovereign debt — but more importantly in how the deal was run.
This was no market driven transaction, with a true price discovery process and an international investor base. Rather, it was a carefully choreographed performance to ensure that BoC collected its $6.5bn, no questions asked.
One banker called it "the biggest, oddest deal" he’d ever seen. And it was extraordinary. Sole global co-ordinator Bank of China International had already locked down $4bn of orders before the other syndicate banks were even approached to join the deal.
Then, before the books opened on Wednesday, a note was sent out to say the book was at $14bn. Some $4.5bn-$5bn of this was anchor orders, leaving just $1.5bn to find on the day.
The transaction didn't much introduce the borrower to a new investor base, either. BoC had toyed with the idea of a euro tranche, but decided to drop it just one day before the deal opened. It made all the right noises about its willingness to pay up in euros to access a diversified pool of investors, but in the end it failed to deliver.
Perhaps most importantly, though, it did not meet the international standards expected of big global deals in terms of transparency. According to the bookrunners brought in to help BoCI, the identity of $4bn of allocations was not revealed to them.
Only BoC and BoCI will ever know exactly who these accounts were, but speculation is rife. If the majority of the bond was sold to friends and family-type Chinese accounts — much like in an IPO — can the deal really be considered an international capital markets transaction?
There's no question that the deal was an achievement, but this style of execution showed a lack of respect for market convention. That matters, given that China wants to be considered a global financial markets player. But perhaps more importantly, undermining capital markets conventions will not aid the others coming in its wake, who are likely to need to tap the international investor base in order to get their deals done.
BoC's deal was in some ways an eye-opener in terms of how much cash is available to be put to work in China, but the borrower cold have stayed onshore if it just wanted to tap domestic liquidity. And with the regulator restricting the number of investors to 200, there was a lot of fluff in the $21.8bn of orders.
Instead of just showcasing China Inc's firepower, this deal ought to have been an opportunity to demonstrate to global markets that Bank of China could play fair as well as big — if only for the sake of its peers.