May 19 (Bloomberg) -- Agricultural Bank of China, raised 50 billion yuan ($7.3 billion) in the nation’s biggest corporate bond sale to boost capital and help pave the way for an initial public offering.

The largest lender to China’s 800 million farmers increased the sale of subordinated bonds from a targeted 40 billion yuan, Beijing-based Agricultural Bank said in a statement posted on the official Chinabond Web site today.

The sale may lift Agricultural Bank’s capital ratio above the 10 percent minimum that allows it to sell shares to the public. The IPO, planned for as early as the second half of this year, would be the biggest by a Chinese lender since 2006 and cap a decade-long reorganization of the banking industry that cost $650 billion.

“Although the bond sale paves the way for the IPO, the overall restructuring plan remains murky,” said Liao Qiang, a Beijing-based analyst at Standard & Poor’s. “Agricultural Bank’s rural operation is a low-margin, high-risk business.”

Agricultural Bank has weaker capital ratios than its three largest domestic rivals even after getting $19 billion from the government in October, potentially making it less attractive to equity investors.

Callable Bonds

Agricultural Bank sold 20 billion yuan of 10-year callable bonds at a coupon rate of 3.3 percent for the first five years and 25 billion yuan of 15-year bonds at 4 percent for the first 10 years on the nation’s interbank market, according to data compiled by Bloomberg.

The lender also sold 5 billion yuan of floating-rate bonds at 0.6 percentage point above the benchmark one-year deposit rate. China International Capital Corp. underwrote the bond sale. Zhou Yuan, a press official at Agricultural Bank in Beijing, declined to comment.

Chinese companies sold 122.3 billion yuan of domestic bonds in the first four months of 2009, triple the amount of the year- earlier period, according to data compiled by Bloomberg. Sales surged amid a moratorium on stock offerings and as companies took advantage of lower interest rates.

China Construction Bank Corp., the nation’s second largest, raised 40 billion selling subordinated bonds in February. The sale was split into 12 billion yuan of 10-year callable bonds at a coupon rate of 3.2 percent for the five years and 28 billion yuan of 15-year bonds at 4 percent for the first 10 years.

Capital Ratios

Agricultural Bank’s capital adequacy ratio stood at 9.41 percent as of Dec. 31, compared with 13 percent for Industrial & Commercial Bank of China Ltd., the nation’s largest lender. China Construction Bank Corp. was at 12.2 percent, and Bank of China Ltd. was at 13.4 percent.

In January, state-controlled Agricultural Bank became a shareholding company, paving the way for it to sell shares. The move completed a decade-long reorganization of the nation’s banks that has cost the government about $650 billion.

Agricultural Bank is planning to attract so-called strategic investors to buy shares in it before the IPO, President Zhang Yun said last week, without providing additional details. China’s Ministry of Finance and a unit of the nation’s $200 billion sovereign wealth fund each hold 50 percent of the lender.

Shanghai Pudong Development Bank Co., part owned by Citigroup Inc., this month won shareholder approval to sell 15 billion yuan of bonds. Bank of China, the nation’s third-largest by market value, said March 6 it plans to sell as much as 120 billion yuan of subordinated bonds over the next four years.

Agricultural Bank had 7 trillion yuan of assets at the end of last year, making it the nation’s third-largest by that measure. It operates 24,064 branches nationwide.

Subordinated bonds are counted as lower-Tier 2 capital. In the event of bankruptcy, holders of subordinated notes receive payment only after other debt claims are paid in full.

To contact the reporter on this story: John Liu in Shanghai at jliu42@bloomberg.net

Last Updated: May 18, 2009 23:37 EDT