Dacheng Advises on the Maiden Issuance of Tier 2 Bonds

On July 25, 2013, Tianjin Binhai Rural Commercial Bank successfully completed an issuance of 1.5bn yuan of Tier 2 bonds on the interbank bond market via public tendering and bidding. This is the maiden issuance of qualified Tier 2 bank capital instrument by one of China’s commercial banks since Measures for Capital Management of Commercial Banks took effect on January 1. Dacheng provided full legal service for the issuer. In the course of service, Dacheng attorneys suggested that the issue of such bonds should require an attorneys’ opinion letter, which was adopted by authorities in charge. The lead attorneys were senior partner Xu Yongqian, partners Guan Qi and An Baijing.
 
In 2012, China Banking Regulatory Commission (“CBRC”) released a Guidance on the Innovation of Capital Instruments for Commercial Banks in which it suggested that commercial banks should, based on a clear understanding of the characteristics of domestic and foreign markets, strengthen regulatory, policy and market researches, stay in close contact and coordination with investors and relevant authorities, so as to create favorable external circumstances for capital instruments innovation and explore ways to issue new capital instruments on different markets. Echoing CBRC advocacy, Tianjin Binhai Rural Commercial Bank pioneered the issuance of Tier 2 bonds, a groundbreaking attempt in capital instrument innovation among China’s commercial banks.
 
The issuance was conducted at a time when the bond market was characterized by a shortage of liquidity, bearish investors, insufficient demand and a high degree of volatility. In line with the new regulations, the Tier 2 bonds, 1.27 times oversubscribed and subject to write-down terms, would be due in 10 years and callable after 5 years at a coupon rate of 6.5%. Credit Suisse Founder Securities, Goldman Sachs Gaohua Securities and Southwest Securities acted as lead underwriter, with Huayinwuzhou CPA LLP acting as auditor and China Lianhe Credit Rating Co. as credit rating agency.
 
With CBRC support and against the backdrop of the implementation of the Guidance, more and more commercial banks turn to Tier 2 capital market to seek financing. The successful issuance of Tier 2 bonds will help expand financing channels for commercial banks, improve their capital structure, raise capital adequacy ratio and enhance their risk resistance capabilities and operational strength.