Bank of China in mid-October sold a landmark US$6.5 billion Basel III-compliant additional tier 1 (AT1) offering, setting a possible benchmark for the rest of big four Chinese banks which are all expected to tap the offshore market to issue AT1 capital securities.

The transaction, which has opened a new asset class out of China, was notable not just for the sheer size of it – at US$6.5 billion, the offering is the largest issue of CoCo bonds, or contingent convertibles, surpassing HSBC’s US$5.6 billion priced in September 2014 – but also for volatile market conditions when the deal was priced.

Despite a notably unstable market backdrop in the US and Europe overnight, the deal managed to get through and the non-call five-year Reg S offering was priced. The bonds fetched a 6.75% yield, or right at the final guidance but tighter than the initial range of between 6.875% and 7%.

The months of work and investor meetings prior to the launch of the deal helped to generate US$4.5 billion to US$5 billion in anchor orders even before the initial guidance was announced. This has raised some market participants to criticize the execution style of the transaction and called the deal “not a fully market-driven transaction”.

Nonetheless, it was an impressive feat for its size and for being the first-of-its kind from the mainland. There is a widespread expectation of a large supply of similar transactions notably from bigger Chinese banks.

According to Morgan Stanley estimates, total AT1 issuances from China’s 16 top banks should exceed US$100 billion based on 1% of their risk-weighted assets.

“There is going to be a large amount of supply from China. The theme is going to be around the scale of the transaction. In terms of structures and yield, there will be little differences,” comments a banker away from the deal.

Being renminbi-denominated but US dollar-settled, the bonds were not eligible for inclusion in J.P. Morgan’s Asia Credit Index (JACI) or its Corporate Emerging Markets Bond Index (CEMBI). Some of the big fixed income managers such as PIMCO, which uses J.P. Morgan’s index as benchmark, were forced to buy these bonds as off-index investments. As such, they would have smaller allocations than they would as index investments.

Still, the deal generated a total order of US$21.8 billion and was allocated to about 200 accounts, sources reveal. Asia accounted for 94% of the final allocation, with European investors taking the rest. In terms of investor type, insurance and sovereign wealth funds dominated with 45% of final allocation, private bankers 29%, fund managers 14%, corporations 7% and banks 5%.

The issue is subject to full or partial compulsory conversion with a hard trigger of 5.125%. This means the bonds can be converted into Hong Kong-listed stocks if its common equity tier 1 capital adequacy ratio drops to 5.125% or below.

The bonds are rated Ba2 by Moody’s Investors Service which is three notches below Bank of China’s Baa2 adjusted baseline credit assessment. “The rating reflects the structure of [the issuance] and our assumption that investors in these securities face the risk of full or partial compulsory H-share conversion upon the occurrence of a trigger event, as well as the probability of impairment associated with dividend suspension, which could precede the bank reaching the point of non-viability,” says Moody’s vice-president and senior credit officer Christine Kuo.

The bonds performed in the secondary, trading at one point at 101.

BOC International was the financial adviser as well as lead manager for the transaction along with BNP Paribas, China Merchant Securities, Citic Securities International, Citi, Credit Suisse, HSBC, Morgan Stanley, and Standard Chartered.