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.

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A branch of Bank of Jinzhou in Beijing, pictured on November 1, 2017. Photo: Imaginechina

Published: 10:30am, 19 Sep 2022Updated: 12:34pm, 19 Sep 2022

Chinese lenders including the Postal Savings Bank and China Merchants Bank are preparing to pay off more than US$12 billion of perpetual debt before funding costs tied to US Treasuries surge further, while hoping to protect their market reputation at the same time.

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.

Others including Bank of Qingdao will settle US$1.2 billion of notes on September 20 while Bank of Zhengzhou will call its US$1.19 billion notes on October 18. Bank of Zheshang completed its move in March.

Four successive rate hikes in the US this year have ended decades of cheap money for borrowers in offshore markets, as the benchmark 10-year Treasury yields rose to 3.45 per cent this month, a level not seen since April 2011. Another 50- or 75-basis point increase this week could make it uglier for these lenders, whose perpetual notes issued in 2017 are due for a coupon reset every five years, if not redeemed.

A trader works at the New York Stock Exchange on September 13. Four successive rate hikes in the US this year have ended decades of cheap money for borrowers in offshore markets, as the benchmark 10-year Treasury yields rose to a level not seen since April 2011. Photo: Xinhua

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.