BEIJING: Chinese banks including Agricultural Bank of China Ltd and China Construction Bank Corp are rushing to sell up to 150 billion yuan ($24 billion) of subordinated debt by the year-end ahead of tougher issuance rules, bank disclosures show.
That would surpass the 100 billion yuan of subordinated bonds issued year-to-date, according to Thomson Reuters data.
Under the new rules, the funds raised by banks through subordinated bonds won't be counted as part of their capital base, unless investors are willing to write down the value of the debt entirely or allow the bonds to be converted into shares, according to regulatory and banking sources.
This means sub-debt investors - frequently domestic financial institutions and insurers who prefer to be ranked above ordinary shareholders in case of a default - will have to re-look their risk-assessment models when making such investments.
"When the difference between sub-debt and equity becomes blurred, how are the regulators going to ensure that sub-debt holders are paid before shareholders?" asked a source with the asset management arm of Aviva-Cofco Insurance.
The rules are among changes that banks in China must adhere to in accordance with the Basel III rules, which call for more stringent requirements for capital adequacy. Chinese regulators said previously that the changes will be put in place by the beginning of next year.
The rules have prompted banks including Agricultural Bank and China Construction Bank (CCB) to fast-track their debt issuance plans, with AgBank looking to sell 50 billion yuan of bonds and CCB 40 billion yuan of debt by the end of this year.
Otherwise, any new issue from 2013 onwards will be subject to the new regulations on subordinated debt, banking sources said, citing instructions from the regulators.
They declined to be identified because the China Banking Regulatory Commission was still seeking internal feedback on the new rules.
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