China Readies First Perpetual Bond Issue By Bank, But Demand Could Be Weak | 3/28/2016 | Staff
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SINGAPORE/SHANGHAI (Reuters) – China took a big step last week on the long road toward recapitalization of banks hobbled by stale loans, giving a first ever approval for a perpetual bond issue by a lender, but going by initial feedback “perps” could be difficult to sell.

The role of pathbreaker has fallen to Bank of China (BoC) , the country’s fourth-largest lender. Last Thursday, the banking and insurance regulator gave BoC clearance to issue up to 40 billion yuan ($5.9 billion) of non-fixed term bonds.

Bank - China

How it fares will be scrutinized by every other bank in China.

Alarmed by a slowing economy, policymakers are in a hurry to have banks fit enough to ramp up credit expansion, but banks’ lending capacity is largely limited by their capital adequacy.

Lenders - Additional - Tier - AT1 - Capital

Most Chinese lenders have relatively thin Additional Tier 1 (AT1) capital, and before approval was given for perps the only way that banks could raise AT1 capital was through the issuance of preference shares.

But with many listed banks now trading below their book values in a weak stock market, lenders find it challenging to sell additional shares and are increasingly looking to the onshore bond market to take advantage of current low yields.

CIB - Research - Unit - Industrial - Bank

CIB Research, a unit of Industrial Bank , estimated Chinese lenders need to raise 470 billion yuan ($69.24 billion) this year through perps and preference shares to cover a shortfall in Additional Tier 1 capital.

Investors would need a higher yield to compensate them for the higher risk, as perp holders have less claim than normal debt holders, and only slightly more claim than equity holders.

Risks - Returns - Gu - Weiyong - Investment

“Theoretically the risks of holding them are very high and the returns are limited,” said Gu Weiyong, chief investment officer of UCON Investments, a private fund. “There are better investment options than that.”

BoC declined to comment on its perp plans,...
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