New CoCo Issue Alert : BANK OF CHINA AT1 PREFERENCE SHARES USD 6.875-7%

ISSUER:   Bank of China Limited (3988.HK /601988.CH) (the “Bank”)
ISSUER RATINGS:  A1 (stable) Moody’s / A (stable) S&P / A (stable) Fitch
EXPECTED ISSUE RATINGS:  Ba2 (Moody’s) / BB- (S&P)
ISSUE:    Basel-III Compliant Additional Tier 1 Capital Offshore Preference Shares
CURRENCY: Settled in the equivalent amount in USD at the fixed exchange rate to be determined at pricing
RANKING:  Subordinated to all obligations of the Bank (including any Tier 2 instruments) and senior to ordinary shares
FORMAT:  Reg S, Registered
ISSUE SIZE: USD Benchmark
TENOR:  Perpetual NC 5 Years
PRICE GUIDANCE:  6.875 – 7.000%
USD FACE VALUE PER SHARE:USD [  ] (to be determined at pricing)
DIVIDEND RATE:   Fixed rate, payable annually
DIVIDEND RATE RESETS:   On the 5th anniversary and every 5 years thereafter, reset to a new fixed dividend rate equal to the prevailing 5-year U.S. Treasury Rate plus a fixed initial margin
DIVIDEND CANCELLATION:  Cancellable at the discretion of the board on a non-cumulative basis, subject to shareholders’ approval
DIVIDEND STOPPER: Yes, applicable on ordinary share dividends
OPTIONAL REDEMPTION:   On the 5th anniversary and at every Dividend Payment Date thereafter subject to satisfaction of applicable redemption conditions and CBRC approval
COMPULSORY CONVERSION:   Upon occurrence of AT1 Capital Instrument Trigger Event, the Offshore Preference Shares will be converted in whole or in part into the Bank’s H Shares to the extent necessary for the AT1 Capital Instrument Trigger Event to cease to continue; upon occurrence of T2 Capital Instrument Trigger Event, the Offshore Preference Shares will be converted fully into the Bank’s H Shares
INITIAL COMPULSORY CONVERSION PRICE: HKD3.44 per H Share (translated into RMB using the fixed exchange rate of HKD1: RMB0.79499), subject to certain anti-dilution adjustments
COMPULSORY CONVERSION EVENTS:
(i) AT1 Capital Instrument Trigger Event: CET1 CAR at 5.125% or below;
(ii) T2 Capital Instrument Trigger Event: the CBRC having concluded that a conversion or write-down is necessary without which the Bank would become non-viable, or the relevant authorities having concluded that a public sector injection of capital or equivalent support is necessary without which the Bank would become non-viable
VOTING RIGHTS: Offshore Preference Shares carry voting rights only in certain limited circumstances. If the Bank fails to pay dividends to holders of Offshore Preference Shares for any 3 financial years in aggregate or 2 consecutive financial years, holders of the Offshore  Preference Shares shall have the same voting rights as ordinary shareholders  until such time the Bank has paid the dividends payable on the Offshore Preference Shares for the relevant period in full
DETAILS:  HKSE listing / Par value RMB100 per Offshore Preference Share / PRC Law / OTC Trading
MINIMUM SUBSCRIPTION AND TRANSFER AMOUNT:     20,000/100 Offshore Preference Shares
GLOBAL CO-ORDINATOR:   BOC International
BOOKRUNNERS:  BOC International, BNP PARIBAS, China Merchants Securities (HK), CITIC Securities International, Citi, Credit Suisse, HSBC, Morgan Stanley (B&D) and Standard Chartered Bank
TIMING:  As early as today

** USD OFFSHORE PERP-NC-5YR PREFERENCE SHARES ANNOUNCED
** PRICE GUIDANCE: 6.875-7.000%
** ISSUE SIZE: UP TO APPROXIMATELY US$ 6.5 BN
** ORDERS/IOIs USD 14BN PRE-ANNOUNCEMENT OF PRICE GUIDANCE (INCLUDING USD 4.5-5BN STRATEGIC ANCHOR ORDERS)
** LIMIT TO 200 PLACEES IN PRIMARY MARKET & NO RESTRICTION ON THE NO. OF HOLDERS IN THE OTC SECONDARY MARKET.

The moment has arrived. The first wave cometh and ICBC is next.

Tricky issue given that JPM will probably not be including this bond into their famous JACI (JPM Asia Credit Index) and CEMBI (JPM Corporate Emerging Market Bond Index) indices.

Bonds currently in the indices : Sberbank, Banco de Brasil, CITIC Bank Intl, Chong Hing Bank, Woori Bank, Banco Santander, Gazprombank and Credit Bank of Moscow.

Their reasons are as follows.
1. The bond is ultimately RMB denominated even if it pays coupons in USD and settlement is in USD.
2. The governing law is Chinese law because the bond is a preference share structure, unlike the BOC Tier 2 issues which are bond structures. Thus arbitration, if any, in the future would not be international and that is a risk.
3. The tax implications have not been fully addressed and are rather ambiguous given that non residents can be taxed 10% upon sale of shares/equity.

Qualifier :  summary is my own and may not be accurate to detail and fact.

For the layman, buying into BOC is akin to buying into the integrity of the Chinese government.

This will be a PB and hedge fund bond and I do not believe many real money fund managers would be allocating too much into it or be mandated to buy this bond (no JACI).

I think 6.875-7% coupon is decent if we compare against the other AT1’s out there.

Barclays 6.5% 06/2019 call  B  indic yield 7.5%
Barclays 7% 09/2019 call B indic yield 8.2%
BBVA 7% 02/2019 call BB (Fitch) indic yield 6.5%
Coventry Building Society 6.375% 11/2019 call BB+(Fitch) indic yield 7.6%
Deutsche Bank 6.25% 04/2020 call Ba3/BB/BB+ indic yield 6.5%
HSBC 5.25% 09/2022 call Baa3/BBB indic yield 5.3%
Lloyds 7% 06/2019 call B+/BB indic yield 7.4%
Nationwide 6.875% 06/2019 call BB/BB+ indic yield 7.4%
Banco Santander 6.375% 05/2019 call Ba1 indic yield 7.1%

Recently launched Chong Hing Bank 6.5% 09/2019 call Ba2 is trading at about 6.74%. Bearing the same rating as BOC except that the bond is listed under international law.

BOC HK (3988 HK) is paying a dividend of 6.93% currently. Thus 6.875-7% is not a short change.

In all, a fairly priced issue, all aspects considered except for the legal bits.

Be prepared for poor allocations even for the 6.5 bio worth of bonds to be sold. Don’t worry, there will be more to come ! And if you miss them all, there are still the Americans facing a capital gap of up to $870 bio. http://www.bloomberg.com/news/2014-10-13/too-big-fail-banks-seen-facing-capital-gap-of-up-to-870-billion.html

Good luck !