MNI: China Tier-2 Capital Bond Issuance Surges in 2017

     BEIJING (MNI) - The issuance of tier-2 capital bonds in China doubled in

2017, suggesting that banks have significantly higher funding demands this year

in order to meet requirements of regulators by the end of the year. 

     Tier-2 capital bonds are issued by banks to raise capital to supplement

their tier-2 capital and to boost their overall capital adequacy ratios. In

terms of the sequence of debt settlement, tier-2 capital bonds are subordinate

to other types of bonds, while more senior than equities.

     The issuance of tier-2 capital bonds surged from CNY227.4 billion in 2016

to CNY478.8 billion in 2017 (through Dec. 27). The issuance of tier-2 capital

bonds in the fourth quarter also jumped from CNY81.9 billion in 2016 to CNY212.3

billion in 2017, according to data compiled by Wind, a financial information

provider.

     Net issuance also surged, to CNY434.6 billion in 2017 from CNY200.4 billion

last year. As the majority of tier-2 capital bonds have a duration of 10 years,

the surge was not due to the rollover of maturing tier-2 capital bonds alone.

     --JUMPING THROUGH HOOPS

     Banks face a number of demands by regulators to supplement their capital,

especially at the end of the year. 

     The required capital adequacy ratios for banks that are "not systemically

important," as defined by regulators, and that are "systemically important" are

10.5% and 11.5%, respectively -- both figures being two percentage points higher

than tier-1 capital adequacy ratios for the same categories. Therefore, banks

can issue tier-2 capital bonds to fill the two-percentage-point gap after they

meet the requirements for tier-1 capital adequacy ratio. Excess loan loss

provisions can also be counted as tier-2 capital.

     In addition, issuing tier-2 capital bonds can help banks prepare for their

PBOC-administered macro-prudential assessments (MPA).

     "The capital adequacy ratio in the MPA test is tightly linked to banks'

credit growth," as the capital adequacy ratio effectively sets the upper limit

of banks' credit growth in the MPA test, Liu Chengran, vice chairman at the

Institute of Financial Supervision, a Shanghai-based financial law consulting

firm, said in a report published earlier this year. "So issuing more tier-2

capital bonds [to boost capital adequacy ratios] will help banks to pass the MPA

test."

     Banks often hold each other's tier-2 capital bonds through their wealth

management products, because of the unattractiveness of the bonds.

     Tier-2 capital bonds also have poor liquidity and offer relatively lower

yields, and always come with options allowing banks to write off their tier-2

capital bonds or swap those bonds for equity stakes under extreme circumstances,

a condition that ultimately brings greater losses to bond holders than they

would suffer if they held normal bank bonds.

--MNI Beijing Bureau; +86 10 85325998; email: he.wei@marketnews.com

--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com

[TOPICS: M$A$$$,M$Q$$$,MT$$$$,M$$FI$]