CCB joins capital raising queue - again
CCB's new offering of 40 billion yuan in debt will be followed by more similar issues from other struggling banks, and could meet with mixed reception from global buyers.
The near non-stop capital raising by major Chinese banks is showing no sign of slowing, with China Construction Bank (0939.HK; Shanghai: 601939) announcing yet another new plan to sell up to 40 billion yuan, or US$6.5 billion, in subordinated debt to shore up its balance sheet. Similar to most recent cases, these bonds will be sold into the inter-bank bond market for domestic buyers, meaning that big state-backed institutions are likely to pay most of the bill for this latest recapitalisation of a major Chinese bank, most of which are standing on the cusp of a major bad-loan crisis.
Let's look at the latest news, which comes less than a month after Bank of China (3988.HK; Shanghai: 601988) announced a similar plan to raise up to 23 billion yuan through its own subordinated bond offering. This new capital raising announcement by CCB doesn't come as a complete surprise, since the company, China's second largest bank, received approval to offer up to 80 billion yuan in subordinated debt back in 2011. It subsequently made an offering for 40 billion yuan worth of debt from that allotment, and now it's returning to the market to offer the remaining 40 billion yuan.
CCB needs the money as China's major banks stand on the cusp of a major bad loan crisis, following a government-ordered lending binge in 2009 and 2010 during the height of the global financial crisis as part of Beijing's four trillion yuan economic stimulus package. Many of the loans made during that time were questionable in nature, and industry observers believe the banks are now doing their best to hide and deal with billions of dollars in loans that will never be repaid.
Many top lenders and also insurers who may also be at risk embarked on a big round of capital raising in the second half of 2011 and into the early months of this year, prompting me to predict that 2012 would be a year of big new capital raising. But tepid market sentiment both in China and abroad, combined with Beijing's own indecision on how to deal with the looming crisis, led to a pause in new fund raising announcements since the beginning of the year. That pause now appears to be finished, and we can probably expect a few more similar major capital raising plans from other banks over the next few months.
Most of the recent debt offerings have been sold to state-backed sources, reflecting dwindling interest from private investors in helping to recapitalize Chinese banks that often act more like policy lenders than true commercial banks. This case looks like it will continue the trend, with state-backed domestic entities as the most likely buyers of these bonds.
Interestingly, foreign media reported earlier this month that CCB is also looking to list some of its bonds in London. Bonds from this latest offering look unlikely to find their way to such a listing in London. But if CCB does go ahead with the plan, it will be interesting to see how investors react to such bonds. I suspect they would get a modestly positive reception, since most investors will bet that CCB is likely to repay such debt, even if that requires another cash infusion from Beijing. But I do also expect a certain degree of skepticism, as investors will also start to question the advantages of buying debt from this kind of a shaky lender whose performance largely hinges on the whims of Beijing policymakers.
Bottom line: CCB's new offering of 40 billion yuan in debt will be followed by more similar issues from other struggling banks, and could meet with mixed reception from global buyers.