Industrial and Commercial Bank of China, the world's largest commercial bank by assets, will issue the first euro-denominated contingent convertible bonds by a Chinese bank as part of a $5.6bn multicurrency deal in Hong Kong.
ICBC's plan to sell coco bonds also includes the largest sale of offshore renminbi bonds - referred to as CNH, its currency code - with a tranche worth Rmb12bn ($1.95bn), far ahead of an Rmb8.4bn debt sale by the Chinese government in May. The euro tranche, at €600m, was the smallest of the three.
The deal marks the second foray into the offshore market by an onshore Chinese bank selling cocos, which count as capital under the new global rules known as Basel III. Bank of China, the country's fourth-largest lender, sold $6.7bn in cocos in Hong Kong in October, all priced in dollars.
"The CNH tranche helps better align the foreign exchange risk [to ICBC]," said a banker involved in the deal.
"The dollar tranche appeals to the more global audience. Euros was done for diversification [of FX risk] and to set a new precedent, not only for ICBC but for the whole China space."
All three tranches carried yields of 6 per cent, below the 6.75 per cent rate on Bank of China's notes but above the 5.625 per cent that HSBC paid on comparable dollar-denominated cocos in September.
The CNH and US dollar tranches give ICBC the option to redeem the bonds after five years should interest rates fall. The euro bonds, by contrast, are redeemable only after seven years. That suggests bankers felt pressure to sweeten the deal for investors in the euro notes.
China's bank regulator is aggressively implementing the Basel III rules in a bid to fortify banks' balance sheets against an expected rise in bad loans as the economy slows. Non-performing loans posted their biggest quarterly rise since 2005 in the third quarter, bringing the system-wide non-performing loan ratio to 1.16 per cent, according to official figures.
Analysts fear the true ratio may be higher, as banks can roll over or extend problem loans to avoid classifying them as non-performing.
Until 2013, Chinese lenders relied exclusively on common equity to raise regulatory capital. But regulators have sought to ease the burden of meeting the Basel standards by approving the use of new hybrid securities as a way to expand fundraising options for lenders.
Last year banks won approval to begin selling loss-absorbing subordinate debt known as Basel bonds. In April this year, the securities regulator gave banks and other listed companies the green light to sell cocos, also known as preference shares.
Rating agency Fitch expects total issuance of cocos and Basel bonds by China's five biggest banks at home and offshore to reach $20bn by year-end. Mainland lenders have announced plans to raise a total of more than $64bn through hybrid securities by the end of 2015.
But doubts remain over whether prevailing yields on hybrid capital securities are high enough to attract demand for the flood of paper coming to market.
"There are reservations about whether pricing will adequately reflect the risks," Fitch said. An investor survey by the rating agency found that 67 per cent of respondents are considering investing in China bank securities but have doubts over current pricing.
ICBC International served as sole global co-ordinator. Goldman Sachs, UBS and Bank of America Merrill Lynch were lead bookrunners on the ICBC. Moody's rated the bonds Ba2.
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