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Bank of East Asia: Strategic Review to Set AT1 Value; Forewarned Is Forearmed

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Bank of East Asia: Buy the Inefficient Capital Securities

Gravity Works As WeWork Doesn't; Now Plan B

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Debt Capital Markets

We see fair value in a new five-year Additional Tier 1 (AT1) bond from <a href="https://www.smartkarma.com/entities/bank-of-east-asia-ltd" target="_blank" data-smartkarma-citation="entities:341:1" rel="noopener">Bank of East Asia (BNKEA)</a> as fully priced with a 5.5% coupon. Pricing at this level could impact BNKEA’s currently outstanding 2024 and 2022 callable AT1 securities.  We re-iterate our recommendation that investors Buy BNKEA’s inefficient capital bonds, including the 2022 callable AT1 note.BNKEA mandated 15 financial institutions to arrange a series of fixed income investor calls commencing on Monday, 12 October. A Reg S offering of a US$D-denominated Basel III-compliant AT1 security may follow. The issue is expected to be rated at Ba2/ BB by Moody’s and S&amp;P, respectively, which is the same level as its currently outstanding AT1 bonds.We believe a five-year note is the most likely outcome following BNKEA’s fixed income roadshow; however, should BNKEA see demand for a longer duration to first call date, we see around an additional 55 basis points in coupon price per additional year to call as needed to capture credit and interest rate levels. For additional background on BNKEA, which forms an integral component of our assessment and recommendation, please see <a href="https://www.smartkarma.com/insights/bank-of-east-asia-strategic-review-to-set-at1-value-forewarned-is-forearmed" target="_blank" data-smartkarma-citation="insights:42705" rel="noopener">Bank of East Asia: Strategic Review to Set AT1 Value</a>. In this insight we concentrate on deriving the fair value of a new AT1 bond from BNKEA.

We see fair value in a new five-year Additional Tier 1 (AT1) bond from Bank of East Asia (BNKEA) as fully priced with a 5.5% coupon. Pricing at this level could impact BNKEA’s currently outstanding 2024 and 2022 callable AT1 securities.  We re-iterate our recommendation that investors Buy BNKEA’s inefficient capital bonds, including the 2022 callable AT1 note.BNKEA mandated 15 financial institutions to arrange a series of fixed income investor calls commencing on Monday, 12 October. A Reg S offering of a US$D-denominated Basel III-compliant AT1 security may follow. The issue is expected to be rated at Ba2/ BB by Moody’s and S&amp;P, respectively, which is the same level as its currently outstanding AT1 bonds.We believe a five-year note is the most likely outcome following BNKEA’s fixed income roadshow; however, should BNKEA see demand for a longer duration to first call date, we see around an additional 55 basis points in coupon price per additional year to call as needed to capture credit and interest rate levels. For additional background on BNKEA, which forms an integral component of our assessment and recommendation, please see Bank of East Asia: Strategic Review to Set AT1 Value. In this insight we concentrate on deriving the fair value of a new AT1 bond from BNKEA.

Bank of East Asia’s New AT1 – Likely Coupon and Curve Impact