China Construction Bank Asia Corp. is marketing a sale of dollar-denominated bonds, testing demand for the nation’s bank debt after the cost of insuring similar notes jumped the most in Asia this year.
CCB Asia, a unit of China’s second-largest lender, plans to sell $300 million of three-year securities at about 175 basis points more than Treasuries, according to a person familiar with the matter, who asked not to be identified because the terms aren’t set. Investor perceptions of risk for China Development Bank Corp., Export-Import Bank of China and Bank of China Ltd. worsened the most since Dec. 31 among 40 investment-grade borrowers in an Asia gauge excluding Japan.
China may encounter “serious” cash flow problems and needs good liquidity control for the next two years, according to remarks made by former China Banking Regulatory Commission Chairman Liu Mingkang in today’s Shanghai Securities News. Non-performing loans increased for a ninth-straight quarter to the highest level since the 2008 financial crisis in the last three months of 2013, the watchdog said last month. Some lenders are also facing protests from disgruntled investors that bought failed trust products they distributed.
The banking sector is “where the skeletons lie,” said Tim Condon, head of Asia research at ING Groep NV in Singapore. “When you have a massive stimulus of the kind that China had, it’s inevitable. You’re going to get some NPLs and banks need capital, so I think investors are sensitive to that.”
CCB Asia plans to sell its notes as soon as today, the person with knowledge of the details said. The bank is one of five Hong Kong subsidiaries of mainland banks that will likely expand their loans at a faster-than-average pace due to increased lending to onshore borrowers, Moody’s Investors Service wrote in an e-mailed report today.
Sumitomo Mitsui Financial Group Inc., Japan’s second-largest lender, is also planning a sale of bonds in the U.S. currency, a separate person said. The lender is considering issuing 10-year subordinated notes that comply with Basel III regulations, that person said.
The cost of insuring China Development Bank’s debt rose 53 basis points this year, as China Exim’s credit-default swaps increased 52 basis points and Bank of China’s contracts gained 48 basis points, prices from data provider CMA show.
The Markit iTraxx Asia index added 3.3 basis points this year through yesterday. The measure advanced 1 basis point to 134 basis points as of 8:16 a.m. in Singapore, Australia & New Zealand Banking Group Ltd. prices show. The series began trading on March 20. The previous series ended last week at 124.5 basis points, according to prices from CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.
The Markit iTraxx Australia index added 0.5 basis point to 103.5 basis points as of 11:16 a.m. in Sydney, according to Westpac Banking Corp. The Markit iTraxx Japan index also climbed 0.5 basis point to 88.5 as of 9:24 a.m. in Tokyo, Citigroup Inc. prices show.
Credit-default swap indexes are benchmarks for protecting bonds against default and traders use them to speculate on credit quality. A drop signals improving perceptions of creditworthiness, while an increase suggests the opposite.
The swap contracts pay the buyer face value in exchange for the underlying securities if a borrower fails to meet its debt agreements.