Jan 16, 2019 (China Knowledge) - Bank of China (BOC) will become the country’s first issuer of perpetual bonds, planning to sell up to RMB 40 billion of such bonds.
Perpetual bonds are securities that do not have a fixed maturity date and can generate interest payments for holders for an indefinite period.
The BOC is now looking to issue these bonds in order to meet its capital requirement for absorbing losses after running low on capital following a nationwide deleveraging campaign that requires banks to set aside more capital to hedge their off-balance sheet assets.
In addition to this, many banks have also been forced to use up capital to write-off bad loans.
The BOC is expected to issue these bonds at the end of the month with the bonds having an initial coupon rate of between 4.5% to 5.2% with the bank having the option to repurchase the bond after 5 years.
While the plan is still subject to approval from regulators, it will likely be approved and regulators are currently expediating the approval process.
The capital shortage is particularly pressing for China’s big 4 banks which are required by the Financial Stability Board to meet the minimum-loss absorbing capacity requirement by 2025.
To meet the requirement, the banks need a combined RMB 2.85 trillion more capital than they are currently holding.
Regulators are still currently drafting rules around perpetual bonds and how they should be treated from an accounting standpoint and the risks associated with them.
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