LINKLATERS ADVISES ICBC (ASIA)

09 Nov, 2011

Linklaters advises ICBC on the first Basel III compliant offshore RMB capital issue

Linklaters has advised ICBC (Asia) on the first offshore RMB regulatory capital issue designed to comply with Basel III guidelines.

The RMB 1.5bn dated subordinated bond issue is also the first Basel III regulatory capital issue originating in Asia and the first issue of subordinated debt in the rapidly expanding offshore RMB market. ICBC (Asia) is the Hong Kong banking business of ICBC, the largest commercial bank in the world in terms of market capitalisation and in the PRC in terms of total assets. This issue is being seen as a benchmark deal for the region.

This is only the fourth “market” issuance of hybrid bonds to be counted towards an issuer’s tier one or tier two capital resources since the Basel Committee announced its new requirements for additional tier one capital and tier two capital on 16 December 2010 and 13 January 2011. Those requirements provide for capital securities to include a mechanism to force investors to absorb losses — either by conversion into equity or, as in the case of the ICBC (Asia) issue, permanently writing-off the principal amount of the instrument – upon the occurrence of a “non-viability” event. Linklaters has acted on each of these four capital issues in Europe and, now, Asia.

The issuer intends to use the proceeds as a capital contribution to its onshore wholly-owned foreign bank subsidiary, taking advantage of the new Chinese government initiative which allows foreign banks to use offshore RMB to invest in their onshore operations subject to relevant government approvals.

Linklaters’ team was led by capital markets partner William Liu, with capital markets associates Liping Heng and Hanwen Yu in Hong Kong, capital markets partner Nigel Pridmore with capital markets managing associate Jonathan Fried, in London, and capital markets partner Andrew Carmichael in Tokyo.

William Liu said: “This is the first regulatory capital issue in the offshore RMB market, which is further testimony to the depth and potential of that market. This issue is also the latest example of the emergence of the new breed of contingent loss absorbing regulatory capital instruments, which are potentially an attractive way for banks to meet enhanced capital requirements instead of issuing common equity. Our expertise in the regulatory capital and equity-linked markets means that we have advised in connection with all four public issues of contingent loss absorbing capital to date, and we are delighted to have been given the opportunity to bring this experience to the Asian market.

Nigel Pridmore said: “Although regulatory capital requirements are still somewhat fluid, the key requirements have become more certain. This will allow a growing number of banks, from an ever-increasing pool of jurisdictions, to start to issue these types of instruments as the market develops and national regulators begin to discuss potentially compliant structures. The banking industry in many countries is at the start of what is likely to be a long period of restructuring of regulatory capital resources to comply with new post-crisis prudential requirements, so we expect more such deals.”

 

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