HONG KONG, 17 December 2019. Pengyuan International has today published a Monthly Newsletter on Chinese Financial Institutions, which highlights the agency’s views on the latest circular to emphasize on trigger events for TLAC instruments. The report is accessible at www.pyrating.com/ResearchPublications/List.


We believe the guideline may impact the market in the following ways.


1.     Regulator wants to send out a clear message that the Chinese government will not necessarily support banks under distress. TLAC instrument could be a solution to mitigate the risk of the government having to bail out distressed banks and avoiding credit risk spillover from the banking system.

 

2.     We expect a dramatic surge of about RMB3.5 trillion in TLAC issuance by Chinese G-SIBs before 1 January 2025. It would be good to reconsider differential risk and returns among senior unsecured bonds and contingent convertible (CoCo) bonds and subordinated bonds before the massive issuance. It is important for investors to understand the bail-in characteristics of these loss-absorbing investment products.

 

3.     We are also in the hope that the market would operate in a more efficient way in pricing bonds with different risks. Meanwhile, we expect the cost of debt would likely increase under explosive growth in issuance within the next five years. Perhaps the market may introduce new products to lower costs through financial innovation, similar to senior non-preferred bonds issued in other markets.


From a rating agency’s perspective, the regulator’s qualitative considerations – as reflected by whether soft covenants would be triggered under different scenarios – may be as important as whether quantitative covenants are breached.


ANALYST CONTACTS

MEDIA CONTACT

OTHER ENQUIRIES

Primary Analyst

Cyrus Chan

+852 3615 8319

cyrus.chan@pyrating.com

media@pyrating.com

contact@pyrating.com


Secondary Analyst

Stanley Tsai, CFA

+852 3615 8340

stanley.tsai@pyrating.com




Committee Chair

Tony Tang

+852 3615 8278

tony.tang@pyrating.com




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