Banks dash to place junior debt

China's capital market is expected to see a flurry of subordinated debt issuances from local commercial banks in the days ahead as tougher Basil III capital requirements are set to take effect on January 1, 2013.

For example, Shanghai Pudong Development Bank Co, just one of the country's commercial lenders with plans to expand its capital base ahead of the new year via subordinated debt placement, announced Monday that it intends to issue up to 12 billion yuan ($1.92 billion) in 15-year subordinated bonds until this coming Thursday.

Beginning Thursday as well, four other Chinese banks - including Bank of Tianjin, China Guangfa Bank, China Merchants Bank and Beijing Rural Commercial Bank - will sell subordinated debts worth up to 2.7 billion yuan, 4.5 billion yuan, 11.7 billion yuan and 5.1 billion yuan respectively. Moreover, Agricultural Bank of China announced last week that it had finished selling 50 billion yuan in subordinated bonds, the largest sales volume from a single issuer for the year.

"Chinese banks are rushing to sell subordinated debts now due to worries about their inability to issue such instruments when stricter capital regulations comes into effect next year," Yu Fenghui, a senior officer from Agricultural Bank of China, told the Global Times Monday.

In June, the China Banking Regulatory Commission (CBRC) released trial capital management regulations for commercial banks in accordance with Basel III requirements. Under the new rules, banks will not be allowed to use funds raised with junior debt to shore up their capital adequacy ratios unless the fine print on the bond includes terms which write down its value or provide for its conversion into shares.

"Because of the new regulation, Chinese banks will no longer have a financing tool as cheap as subordinated bonds next year," Yu explained.

The Basel Committee on Banking Supervision developed the third installment of the Basel Accords, known as Basel III, to address deficiencies in global financial regulations.