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Hybrid capital bonds

Author: ZhengXing From: www.yourpaper.net Posted: 2009-03-31 23:05:09 Read:
[Abstract] article from hybrid capital bonds and long-term subordinated bonds start to explore the reality of the issue of hybrid capital bonds, as well as the issue of pricing factors analysis made clear it as a new capital management tools will become China's large number of non- a new listed bank capital supplementary channels.
[Keywords] issue of hybrid capital bonds, long-term subordinated capital replenishment channels pricing

A hybrid capital bonds and long-term subordinated bonds

Basel Capital Accord "in accordance with the quality of capital and the ability to compensate for the loss of the bank's capital is divided into Tier two capital and three capital. Hybrid capital instruments in Tier II capital, the provisions of the Basel Capital Accord, which includes the series at the same time has the characteristics of equity capital and debt capital tools. Hybrid capital bonds is an innovative form of bonds designed for the requirements of hybrid capital instruments with reference to the Basel Capital Accord. Compared with the subordinated debt, some of the characteristics of the hybrid capital bonds so that it has a stronger capital property, anti-risk ability to improve the bank's role is more obvious.
Table 1 compares the hybrid capital bonds and long-term subordinated bonds main difference can be summarized as the following five aspects.
1, the long duration of
Hybrid capital bonds maturity of 15 years or 15 years or more, the period of long-term subordinated debt just more than five years. The company liquidity difficulties, can act as a buffer to absorb losses.
2, capital quality, high
Claims on hybrid capital bonds in the long-term subordinated debt, but also deferred payment interest, encountered solvency is insufficient to cover the losses, not insolvency proceedings, which makes hybrid capital bonds, longer-term subordinated bonds with more high quality capital. The long-term subordinated debt can not be used to make up the day-to-day operating loss, but the insolvency proceedings.
3, with a right of redemption
Bank will exercise its right of redemption after 10 years, re-issued hybrid capital bonds to avoid the last five years are included in the supplementary capital accumulated discount, to get higher returns.
4, the upper limit is included in the supplementary capital is higher
The amount of long-term subordinated debt are included in the supplementary capital shall not exceed 50% of core capital, hybrid capital bonds theoretical upper limit can be almost equal to 100% of the core capital (if other supplementary capital is zero).
5, issue more relaxed conditions
Public offering issuance of long-term subordinated debt required to meet the core capital adequacy ratio of 5% or more of the conditions, just a core capital adequacy ratio of 4% to the issue of hybrid capital bonds.

Hybrid capital bonds for a large number of non-listed banks to provide new capital replenishment channels

Supplementary channels for a small number of listed banks, capital is relatively diversified; However, for most of the non-listed banks, capital supplement narrow channels, a single capital structure has become a very serious problem. In this regard, the hybrid capital bonds provide a new way, the issue of hybrid capital bonds is the preferable option for a large number of non-listed commercial banks to replenish capital.
The high-speed development of China's banking sector in recent years led many commercial banks capital often hard-pressed to rely solely on the profits accumulated difficult to keep up with the growth rate of the risk assets, need to raise the capital adequacy ratio of subsidiary capital. As early as 2004, the China Banking Regulatory Commission issued a "commercial banks' capital adequacy ratio management practices" (hereinafter referred to as the "Rules"). "Timely" way of preferred shares, convertible bonds, long-term subordinated debt instruments included in the supplementary capital, greatly enhancing the flexibility of the management of the commercial banks' capital, to promote the improvement of commercial bank capital replenishment mechanism.

However, because of the domestic financial market has yet to cultivate the development of less capital instruments and innovative lagging behind, the existing capital supplementary channels is difficult to meet the required capital regulation and support economic development credit delivery requirements. The outstanding performance: (1) long-term subordinated debt capital property is relatively low, and the scale by the "core capital shall not exceed 50% limit; (2) preferred shares, although the new Companies Act to issue different types of shares left leeway, but still need the State Council of the domestic commercial banks to issue preference shares shall be separately; (3) the vast majority of non-listed banks to issue convertible bonds to the lack of legal basis. In this case, a large number of non-domestic listed banks face a dilemma: On the one hand, you need to have the appropriate credit to support moderate economic development, but by the capital constraints; On the other hand, the domestic capital market is not yet mature, the lack of continuous, open and market-oriented financing arrangements. Therefore, the domestic commercial banks need to address capital supplementary innovative capital instruments, in order to be implemented international capital regulatory capital instruments.
Of mixed capital bonds is to expand the sources of capital for non-listed banks, a financial innovation. This is not only a supplementary channels of capital under the regulatory agencies to actively promote innovation, but also the development of the bond market an innovative new ways and tools to promote the commercial banks, in particular, most of the non-listed banks to adapt to the capital constraints of business transformation. Societe Generale bank in the end of 2006 to become the first commercial bank to explore hybrid capital bonds to replenish capital. With the emergence of this new financial instruments, I believe there will be more commercial banks, in particular non-listed commercial banks to explore this new model and tools.

Third, the reality of hybrid capital bond issuance conditions

1 hybrid capital bonds have a larger investment demand
China's bond market, there are two drawbacks: First, the long-term variety is scarce, limited circulation; second is the inter-bank market, high credit, low-yielding varieties (such as bonds) accounted too high. And hybrid capital bonds with longer maturity, higher yields, has a large demand for investment. From the practice of States, hybrid capital bonds has proven to be challenging but relatively high rate of return. Although interest deferred and deferred payment due of principal and interest to bring a higher risk, but low historical default rates of hybrid capital bonds. Hybrid capital bond credit spreads provide a leveraged exposure, when the credit environment, reduced spreads, the performance of hybrid capital bonds are generally better than other products; vice versa. The same time, in the first 5 years of the hybrid capital at maturity, the issuer generally has the right of redemption, otherwise it will substantially increase the coupon rate, the terms reduce the interest rate risk for investors, help to improve the market acceptance of hybrid capital bonds .
2, China's financial sector and the bond market is sustained and healthy development, the issue of hybrid capital bonds provide a good foundation for
(1) In recent years, China's financial industry, especially the reform and restructuring of the banking sector enhances the stability of the banking system, coupled with the sustained and healthy development of China's economy, the commercial banks more stable operating environment, hybrid capital bonds 10-20 years solvency risk may occur is very small.
(2) the inter-bank bond market continue to grow and develop, more and more different risk preferences, different institutions of the capital background to participate in market investment, market liquidity is getting better and better. At the same time, the focus on continuous disclosure and open market oversight mechanisms matures, hybrid capital bonds from the outset, with a relatively healthy soil. Such as hybrid capital bonds the duration of the issuer should disclose financial information on a quarterly basis, hybrid capital bonds issued to take public offering, the issuer should bond interest and other debt repayment of the principal and interest of public disclosure of the capital adequacy ratio; hybrid The capital bonds public issue should be directed to issue credit rating, the duration of the hybrid capital bonds, credit rating agencies should be regular and occasional track ratings on the hybrid capital bonds. Major events that affect the issuer's performance of its obligations, credit rating agencies should also provide timely follow-up ratings report.
3, a favorable policy environment and regulatory environment is the development of effective protection of hybrid capital bonds
(1) of the China Banking Regulatory Commission was established to comprehensively strengthen the regulatory risks of commercial banks, by means of on-site and off-site inspection, to keep abreast of the commercial bank's risk profile.
(2) Due to the hybrid capital bonds capital property, to protect the interests of investors, the regulatory authorities of the issuer's qualification also has a very high demand. Have good corporate governance mechanism, such as core capital of not less than 4%, a winning streak in the last three years, as well as reserves for loan losses adequately risk indicators satisfying regulatory authority under. This makes a lot of banks that do not comply with the relevant requirements to be blocked in the outside market.
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