Tier 2 market has developed quickly following the first
offering in October;
- Banks in Hong Kong and Singapore have sold
US dollar-denominated Tier 2s. In India and Malaysia
institutions have issued in their local
- Partial and sequential write-downs have
been seen in different offerings, but their inclusion depends
on local regulators’
- More banks are expected to sell US
dollar-denominated Tier 2s, and sources are expected to see
more deals across the region.
Recent Tier 2 offerings prove that Asia’s
regulatory capital market is growing, but the evolution of
write-down features common elsewhere depends on local
Most Asian regulators have now finalised their Basel
III regulations. This has unlocked the Tier 2 market, and more
deals are now expected across the region, including Japan and
But each jurisdiction’s Basel III regime
differs slightly, which will affect how the market develops.
"Specific features are likely to be driven by regulatory
frameworks in each jurisdiction," said Mark Young, head of
Asia-Pacific financial institutions at Fitch
Tier 2 so far
Asia’s Tier 2 market has evolved since
ICBC Asia’s October 2013 offering –
the first Tier 2 from an Asian ex-Australian) bank. It counted
as regulatory capital for both the Hong Kong subsidiary and its
China parent, but investors were concerned that both Hong Kong
and Chinese regulators were able to write down the
Subsequent US dollar offerings, such as those in Hong
China CITIC Bank and
Dah Sing Bank, and in Singapore by UOB, have
performed well. China CITIC’s bonds included a
partial write-down, while
UOB included a sequential write-down so that its
Tier 1 bonds would be written off before its Tier 2s. This
Mizuho announced a Tier 2 offering, marking the first Basel
III deal by a Japanese bank.
Banks testing Basel III structures are also issuing in
local currency; and those offerings are usually Tier 2 bonds.
CIMB opened Malaysia’s regulatory capital
market with a $229 million Tier 2 offering, while
State Bank of India sold $323 million of Tier 2s in
Issuers from these jurisdictions may look to the US
dollar market next. "Asian regulatory capital is evolving
– as it has in Europe – to become more of an
established asset class," said Young.
The inclusion of partial and sequential write-downs
depends on the preferences of domestic regulators. For example,
prohibited ICBC Asia from including a partial write-down in
its Tier 2 bonds.
Sequential write-downs are a newer feature in Asia.
The Monetary Authority of Singapore permitted sequential
write-downs in both
UOB’s Additional Tier 1 (AT1) offering and its
latest Tier 2 bond, although regulators in other jurisdictions
in Asia are hesitant. "This is still a developing area," said
Allen & Overy partner John Lee.
Young compared the Asian regulatory capital market to
that of Europe, noting that in Europe, many markets initially
required full write-offs. But some investors are increasingly
pushing for conversion into equity or partial
If regulators will allow them, they will be featured
in more deals, he added.
But contingent convertibles (CoCos) are not expected
in most Asian jurisdictions, where contractual write-downs have
featured in all completed deals. The exception is in Australia,
where most Basel III offerings have included equity
That’s not likely to change. "Conversion
into equity at the point of non-viability is rarely discussed
in detail for Tier 2s," Lee said.
What to expect
Young believes that there will be more Tier 2 bonds.
Chinese issuers are waiting for the country’s
authorities sign off on partial write-downs and Japanese banks
as well as others throughout the region are thought to be
preparing. As legacy instruments mature and become less
effective from a capital perspective, banks will seek to
And the growing Tier 2 market might pave the way for
AT1s, with Lee hoping to to see them this year. "To have depth
in the Asian regulatory capital markets, we need AT1s as well
as Tier 2s," he said.
ICBC Asia’s USD Basel III-compliant Tier 2 bond
China CITIC’s Tier 2 first
Australia’s first Basel III-compliant Tier 2