Citic Bank Issues Tier 2 Notes as ICBC Mandates Tier 1 Offering

China Citic Bank Corp. sold a Tier 2 bond and Industrial & Commercial Bank of China Ltd. hired banks to offer subordinated securities qualifying as Tier 1 as they executed on earlier announced plans to bolster their capital.

Citic Bank sold 10-year notes with a 6.13 percent coupon, according to a statement on the website of clearing house Chinabond. While it didn’t specify how much was sold, a person familiar with the matter who asked not to be identified said the lender issued 37 billion yuan ($6 billion). ICBC mandated seven banks for an offering of as much as 35 billion yuan equivalent of offshore securities, according to people familiar with the matter.

Lenders globally are seeking to issue so-called Basel-III compliant securities to build an additional cushion against losses and reduce the need for taxpayer-funded bailouts in the event of future financial crises. ICBC, China’s largest lender by market value, also plans to consider selling the subordinated securities in one go, rather than several offerings over a period of time, according to people familiar with the matter.

“Given the size of these banks, it’s not surprising that deal sizes would be such large numbers,” Ashley Perrot, the Singapore-based head of pan-Asian fixed income at UBS Global Asset Management. “It’s just that this type of deal size, and all in one go, isn’t typical for Asia.”

Previously Approved

Citic Bank got approval in June from the China Banking Regulatory Commission to offer that amount to replenish Tier 2 capital. ICBC said in a statement last month it’s seeking to raise as much as 80 billion yuan selling preferred stock in China and offshore. Its board approved a plan to sell as many as 450 million preferred shares through private transactions on the mainland, and no more than 350 million preferred shares offshore, ICBC said in a July 25 Shanghai stock exchange statement.

An ICBC spokesman in Beijing declined to comment on the preferred securities today.

Spain’s Caja de Ahorros del Mediterraneo, which was bailed out by the government in 2011, issued $4.05 billion equivalent of similar securities denominated in euros in March 2010 while Bank of Tokyo-Mitsubishi UFJ Ltd. sold $4.6 billion equivalent denominated in yen in March 2009, Bloomberg-compiled data show. Those notes have since been called.


“China banks have already issued close to $8 billion in senior bonds year-to-date, this is the next wave,” UBS Global Asset Management’s Perrot said. “Given the size of the Chinese economy relative to every other in Asia, they’re going to further dominate issuance. It’s the ongoing Chinafication of the Asian bond market.”

Tier 1 capital consists of common equity and additional securities that have equity-like characteristics, such as having no fixed maturity and being subordinate to most other claims. In order to satisfy the minimum capital adequacy ratio for commercial banks, Tier 1 capital must be at least 4 percent of a bank’s risk-weighted assets.

The hybrid securities have characteristics of both debt and equity and are known by different names around the world including contingent convertibles, or CoCos, in Europe, as well as preference shares.

Bank of China Ltd. is also planning a subordinated securities sale that would count as Tier 1 capital, people familiar with the matter said Aug. 20. China’s fourth-biggest lender sent out requests for proposals and met with 18 banks last week in the process to select underwriters.

Bank of China

Bank of China plans to issue its Tier 1 securities in various currencies, which may include the Chinese yuan, the U.S. dollar and euros, the people said. The lender is targeting a 6 percent to 7 percent coupon.

For regulatory purposes, Bank of China’s coupon is referred to onshore as a dividend payment. It’s being marketed as an interest payment to international investors, the people said.

The Reg S perpetual notes can be called after five years and won’t be fully written down in the case of non-viability but rather converted into H-shares at about HK$3.44 apiece, the people said. H-shares are Chinese shares listed in Hong Kong.

Basel III bonds typically pay higher yields because the notes will be written off or converted to equity if the borrower’s balance sheet deteriorates to a point of non-viability.

— With assistance by Christopher Langner, and Laura Yin

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