Fed hawks push top Chinese banks to pay off US$12 billion of perpetual debt as funding costs surge, market reputation at stake
- Perpetual securities sold by Chinese lenders to replenish their capital in 2017 are due for a big coupon step-up in the coming weeks, if not redeemed
- For the Bank of Jinzhou, the move to repay its perpetual preference shares next month will come at a cost.
The Postal Savings Bank will redeem US$7.25 billion of non-cumulative perpetual preference shares on September 27, while Merchants Bank will repay US$1 billion of similar notes on October 25, according to stock exchange filings. Bank of Jinzhou, a regional lender bailed out by state-run bad loan managers in 2020, will call its US$1.5 billion of such securities on October 27.
With no maturity dates in perpetual debt, borrowers are not obliged to repay noteholders. Market norms require the borrowers to redeem the debt at the first call date as a show of financial strength to assure investors, and to avoid punitive step-ups in annual bond coupons.
“It is aimed at reviving offshore investors’ confidence, although more importantly they are considering lowering financing costs,” said Iris Tan, senior equity analyst at Morningstar. These 2017 perpetual notes pay 4 to 6 per cent coupon annually, about 2 percentage points higher than current domestic interest rates, she added.
“At least for Chinese banks, it’s more likely for these issuers to exercise the call on the first call date,” said Jessica Chen, an executive director at JPMorgan, at a Wednesday banking industry webinar held by the Fitch Ratings.
For large banks, redemption is viewed as a normal market move, according to Harry Hu, a senior director at S&P Global Ratings. Small- to medium-sized banks may be trying not to break the market expectation [of a redemption], otherwise, future issuance by these outfits could be affected, he added.
For the Bank of Jinzhou, however, the move to repay its perpetual preference shares next month will come at a cost. Its Tier-1 capital adequacy ratio will weaken to 8.36 per cent, against the regulatory threshold of 8.5 per cent, said Harry Hu, senior director at S&P Global Ratings.
The lender, based in northeastern China’s Liaoning province, has not signalled how it could replenish its capital with onshore financing after the redemption is completed, something worth monitoring, analysts said.
While the bank could choose not to redeem the notes, it avoided that route “surely because of reputation” risk, said BofA Securities’ director Li Lefu during the same Fitch webinar. “The strong reputational sense is backed by strong government support. It is one of the key reasons [why] many credit investors are still interested in this sector.”
Analysts expect Chinese banks will continue to redeem their offshore securities amid the higher interest rates overseas. The banks, especially the smaller ones, may pay off their costlier overseas debt and refinance onshore where costs are falling amid policy easing, they said.