Scarcity propels BoCom’s AT1 to super tight success
Bank of Communications managed to pull off a super-aggressive trade this week, pricing its $2.45bn additional tier one (AT1) offering in line with its larger peers Bank of China (BoC) and Industrial and Commercial Bank of China (ICBC). The key to that impressive feat was taking advantage of an investor base that had been starved of bank capital paper as well as higher yielding products, writes Rev Hui.
Like the Chinese AT1s that have come before it, BoCom came to market with plenty of information on potential demand. The Chinese lender had obtained approval for the capital raising from the Chinese Banking Regulatory Commission (CBRC) at the back end of June and many investors had since shown an interest in purchasing the notes.
“Because of regulatory requirements, the entire process starting from the approval stage has been very public, and a lot of investors expressed their interest in the deal before marketing had even begun — which gave us fairly good visibility on books,” a DCM banker on the transaction said.
But things became even clearer when BoCom embarked on a roadshow at the start of the week that spanned Singapore, Hong Kong and London. More indications of interest (IOIs) were gathered by joint global co-ordinators BoCom (Hong Kong), BoCom International, Deutsche Bank and HSBC during this time and a book had essentially been built at a 5% coupon ahead of the actual launch.
With such strong support behind it, BoCom pulled no punches, opening books on the morning of July 22 at initial price thoughts of 5.25% area.
The bids escalated quickly and the leads took the opportunity to slash 25bp off guidance to a final price of 5% — the level where most of the IOIs had been lodged — off the back of a massive $8.3bn order book.
BoCom had no trouble raising the maximum $2.45bn approved by the CBRC and the perpetual non-call five preference share offering was eventually sold at par.
Almost all market participants who spoke to GlobalCapital Asia agreed that BoCom pulled off a very aggressively priced transaction, especially when compared to other local and global AT1s. Bank of China’s 6.75% AT1, for example, was trading at 4.954% before bookbuilding started, while ICBC's 6% AT1 was trading at 4.888%. HSBC also has a 5.625% AT1 trading at 4.933%.
BoCom managed to price in line with its much bigger peers once curve extension had been taken into account, which was a huge surprise to a Singapore-based credit analyst.
“Fundamentally BoCom is good, but definitely not as strong as a BoC or ICBC,” the analyst said. That was reflected by the BoCom issue’s Ba3 rating, lower than BoC's and ICBC's deals, which were rated Ba2/BB- and Ba2/BB, respectively.
“It’s basically flat to BoC and ICBC, which for me is very expensive because their senior bonds do not trade in line with one another,” the analyst said. “Why should the AT1s be any different?”
He also found it strange that investors found Woori Bank’s Ba2/BB rated $500m 5% AT1 last month expensive, yet were more than happy to chip into the BoCom trade at an identical coupon. To add to his confusion, the Woori AT1 was arguably more investor-friendly with no hard common equity tier one (CET1) trigger. Korean bank bonds also tend to trade tighter than their Chinese counterparts in senior.
Technicals, not fundamentals
But the deal’s overwhelming response despite the miserly pricing did not come as a surprise to a syndicate banker away from the deal, who said that Chinese AT1s were being driven mainly by technical factors rather than fundamental credit strength.
“A huge part of the expensive valuation is down to the lack of bank capital paper in the market, in particular AT1s,” the syndicate banker said.
There has only been one Chinese bank capital deal in the international bond market this year, which was a huge disappointment as the sector failed to continue the momentum with which it ended 2014, when there was a series of high profile deals from BoC and ICBC. And the one deal seen so far in 2015 was a tier two offering from China Construction Bank (CCB) rather than an AT1.
The syndicate banker said he did not expect the situation to change anytime soon, given the lack of suitable candidates to issue offshore AT1s out of China.
“It’s important to remember that bank capital is still very new to China and the regulators are being very cautious in picking the right banks to go offshore,” the banker said. “That is why we’ve only seen the top tier banks issue offshore. It’s hard to see any of the guys outside of the big four or five issuing offshore AT1s anytime soon.”
In his eyes, the demand and supply imbalance is further skewed by a Chinese investor base that is fairly price insensitive, as a good portion of them invest in bank capital deals with little regard of structural subordination. Instead, they are banking on BoCom’s status as one of the big five Chinese banks and that the state will always be there to support it in the event of a default, due to its systemic importance.
That was also the sentiment shared by one Hong Kong-based investor who bid for the preference shares even though he had fair value at 5.3% — some 30bp back of final pricing. While he, too, found the AT1s expensive, he was counting on the Chinese contingent to continue to drive prices tighter in the secondary market.
While the strong presence of Chinese investor support was not explicitly revealed by the deal’s distribution statistics, bankers on the deal said allocations were indeed heavily skewed towards China.
Asia took 95% of the deal. Fund managers bought 48%, sovereigns 19%, banks 18%, insurance 12% and others 3%.
Even though bankers on and away from the deal agreed that scarcity value was the main factor driving BoCom’s AT1 success, one head of syndicate on the transaction pointed out that some credit also had to go to an improving market backdrop.
Asia ex-Japan had not seen a single dollar issuance for three weeks until the lull was broken by Korea Gas Corp and Shanghai Construction Groupon on July 13. Investor sentiment was previously bogged down by the Greek debt impasse, which was reflected by the Markit iTraxx Asia ex-Japan Investment Grade five year spread shooting up to a six month high of 121bp on July 8.
Conditions, however, have improved markedly ever since the “agreekment” announced by European Union president Donald Tusk on July 13, with the same index tightening to 106bp on July 22.
“Everyone saw the window appear but what really made this deal work was the diversification it offered to investors,” the syndicate head said. All the dollar deals to have priced since the market reopened have been investment grade. As a result, the BoCom AT1 was able to slot nicely into the portfolios of investors who have been stuffed with low yielding notes and are looking for higher yielding alternatives while the high yield market remains shut.
“A part of the market has definitely gone into risk-on mode, although the broader market is still quite jittery,” the syndicate head said. “It’s a slightly neither one thing nor the other sort of situation, but that suited us just fine and the BoCom AT1 benefited greatly from that.”
Citic CLSA Securities, CCB International, Goldman Sachs, Citi and JP Morgan were joint bookrunners and joint lead managers for the Reg S-only trade.
The deal comes with a trigger that requires it to be converted either in part or fully into H-shares at HK$6.51 per share if the lender’s common equity tier one capital adequacy requirement (CET1 CAR) falls below 5.125%, or if the CBRC deems the bank non-viable without a write-off or conversion of the bank’s capital.