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(Adds lead banks in last paragraph)
By Lianting Tu
SINGAPORE, Oct 17 (IFR) - Bank of China braved aweak market this week to sell a landmark US$6.5bn offering ofBasel III-compliant Additional Tier 1 preference shares and,with it, open the door to a new asset class for China.
The non-call five-year offering, which is the firstpreference share deal from a Chinese issuer, easily set a numberof records, despite some restrictions that could have deterredbond investors.
It is the world's biggest issue of contingent convertiblecapital, beating HSBC's previous peak of US$5.6bn set lastmonth, and is also the largest fixed-income offering out of Asiaif considered a fixed-income instrument, beating Sinopec'sfive-tranche US$5bn bond earlier this year.
The issue priced at 6.75%, right on the final guidance, buttighter than the initial indicative range of 6.875%-7.000%.Despite an immensely volatile market backdrop in Europe and USovernight, few accounts pulled out of the transaction.
The legwork that leads did months ahead of the offering toeducate investors helped seal the offering, according to bankerson the deal.
"We met about 200 investors globally to explain thestructure. As it is a very new asset class out of Asia, wewanted to give them plenty of room to digest the information,"said one banker on the transaction.
The efforts of the leads to communicate with investorsimpressed rival banks, too.
"It's an impressive deal on any measure. Initially, we wereapprehensive about the sheer size because a deal like this hasnever been done before (in Asia)," said one rival banker. "Hatsoff to Bank of China International (among other leads) forgetting it done, despite the many constraints and the fact ittraded well in the secondary market."
Among the constraints were the Reg S-only format for such abig deal size - meaning US-based investors could not buy - thelimited number of accounts able to participate, the exclusionfrom indices and the renminbi-denominated nature.
Under current PRC regulations, the issue is limited to 200accounts in the primary market. The issue is not included ineither the JACI or CEMBI bond indices because it isrenminbi-denominated (though traded in dollars) and governedunder Chinese instead of Western laws.
"The successful issuance and performance of the BOC AT1 is alesson for future offerings with new structures. It is alwaysgood to spend the time to educate investors rather than just doa routine roadshow," said Raymond Chia, head of credit research,Asia ex-Japan, at Schroders.
TOO BIG TO IGNORE
The education laid the foundation for future deals in anasset class that will soon be too big to ignore.
Total AT1 issuance from China's 16 leading banks shouldeventually exceed US$100bn, based on 1% of their risk-weightedassets, Morgan Stanley said in an August 22 report. ICBC isgearing up for a similar offering of US$5.7bn, although marketparticipants said this would be done next year.
Investors expect the supply to be spread over months oryears, and think second-tier Chinese banks should still be ableto find investor demand, provided they offer a reasonablepick-up. "Price is going to be the determinant," said JamieGrant, Hong Kong-based head of Asia fixed income at First StateInvestments.
"The print of the first deal (BOC) is a good start for thisasset class (AT1)," said a Singapore-based portfolio manager."It will become an important asset class soon."
The shares traded well in the secondary market, hitting 101at one point on retail buying. Many private banks, which eitherdid not get enough allocations or did not bother to put in bidsdue to small order sizes, were loading up on the paper in thesecondary market.
"Considering how the markets closed last night (October 15),I would say that the BOC deal outperformed the broader market.Hopefully, the success of the jumbo deal could also bode wellfor sentiment," Chia said.
The issue, which features a dividend stopper, hard 5.125%common equity Tier 1 and point of non-viability conversiontriggers, and a non-cumulative coupon deferral at the borrower'sdiscretion, drew US$21.8bn in orders and was eventuallyallocated to fewer than 200 accounts.
Asian investors were the main buyers at 94%, while Europeaninvestors bought the rest. In terms of account types, 45% of thebuyers were insurance and sovereign wealth funds, 29% wereprivate banks, which were given a 25-cent rebate, 14% werefunds, 7% were corporations and 5% were banks.
Bank of China International led the trade alongside BNPParibas, China Merchants Securities (HK), Citigroup, CiticSecurities International, Credit Suisse, HSBC, Morgan Stanley(B&D) and Standard Chartered Bank. (Reporting by Lianting Tu; Editing by Daniel Stanton)
