BOC AT1 beats Asian record

(Adds lead banks in last paragraph)

By Lianting Tu

SINGAPORE, Oct 17 (IFR) - Bank of China (HKSE: 3988-OL.HK - news) braved a weak market this week to sell a landmark US$6.5bn offering of Basel 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 first preference share deal from a Chinese issuer, easily set a number of records, despite some restrictions that could have deterred bond investors.

It is the world's biggest issue of contingent convertible capital, beating HSBC's previous peak of US$5.6bn set last month, and is also the largest fixed-income offering out of Asia if considered a fixed-income instrument, beating Sinopec (HKSE: 0386-OL.HK - news) 's five-tranche US$5bn bond earlier this year.

The issue priced at 6.75%, right on the final guidance, but tighter than the initial indicative range of 6.875%-7.000%. Despite an immensely volatile market backdrop in Europe and US overnight, few accounts pulled out of the transaction.

The legwork that leads did months ahead of the offering to educate investors helped seal the offering, according to bankers on the deal.

"We met about 200 investors globally to explain the structure. As it is a very new asset class out of Asia, we wanted to give them plenty of room to digest the information," said one banker on the transaction.

The efforts of the leads to communicate with investors impressed rival banks, too.

"It's an impressive deal on any measure. Initially, we were apprehensive about the sheer size because a deal like this has never been done before (in Asia)," said one rival banker. "Hats off to Bank of China International (among other leads) for getting it done, despite the many constraints and the fact it traded well in the secondary market."

Among the constraints were the Reg S-only format for such a big deal size - meaning US-based investors could not buy - the limited number of accounts able to participate, the exclusion from indices and the renminbi-denominated nature.

Under current PRC regulations, the issue is limited to 200 accounts in the primary market. The issue is not included in either the JACI or CEMBI bond indices because it is renminbi-denominated (though traded in dollars) and governed under Chinese instead of Western laws.

"The successful issuance and performance of the BOC AT1 is a lesson for future offerings with new structures. It is always good to spend the time to educate investors rather than just do a routine roadshow," said Raymond Chia, head of credit research, Asia ex-Japan, at Schroders (LSE: SDR.L - news) .

TOO BIG TO IGNORE

The education laid the foundation for future deals in an asset class that will soon be too big to ignore.

Total AT1 issuance from China's 16 leading banks should eventually exceed US$100bn, based on 1% of their risk-weighted assets, Morgan Stanley (Xetra: 885836 - news) said in an August 22 report. ICBC (HKSE: 1398-OL.HK - news) is gearing up for a similar offering of US$5.7bn, although market participants said this would be done next year.

Investors expect the supply to be spread over months or years, and think second-tier Chinese banks should still be able to find investor demand, provided they offer a reasonable pick-up. "Price is going to be the determinant," said Jamie Grant, Hong Kong-based head of Asia fixed income at First State Investments.

"The print of the first deal (BOC) is a good start for this asset 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 101 at one point on retail buying. Many private banks, which either did not get enough allocations or did not bother to put in bids due to small order sizes, were loading up on the paper in the secondary 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 well for sentiment," Chia said.

The issue, which features a dividend stopper, hard 5.125% common equity Tier 1 and point of non-viability conversion triggers, and a non-cumulative coupon deferral at the borrower's discretion, drew US$21.8bn in orders and was eventually allocated to fewer than 200 accounts.

Asian investors were the main buyers at 94%, while European investors bought the rest. In terms of account types, 45% of the buyers were insurance and sovereign wealth funds, 29% were private banks, which were given a 25-cent rebate, 14% were funds, 7% were corporations and 5% were banks.

Bank of China International led the trade alongside BNP (Paris: FR0000131104 - news) Paribas, China Merchants Securities (HK), Citigroup (NYSE: C - news) , Citic (HKSE: 0267-OL.HK - news) Securities International, Credit Suisse (NYSE: CS - news) , HSBC, Morgan Stanley (B&D) and Standard Chartered Bank. (Reporting by Lianting Tu; Editing by Daniel Stanton)