People's Bank of China Announcement [2006] No. 11

 

To regulate commercial banks' issuance of hybrid capital bonds and protect investor's interests, the PBC announces the followings according to the Law of People's Republic of China on the People's Bank of China and the Management Rules on Financial Bonds Issuance in the National Inter-bank Market (hereinafter referred to as the Management Rules).

 

I. The hybrid capital bonds in the Announcement refer to bonds issued by commercial banks with the following characteristics:

 

Maturity shall be above fifteen years and the bonds cannot be redeemed within ten years since the issuance date. Bond issuers have the once-off redemption rights ten years after issuance. The bond issuer could raise interest rate for the hybrid capital bond if such redemption rights are not executed.

 

Before maturity of the hybrid capital bond, the bond issuer may defer interests payment in the case that its core capital adequacy ratio is below 4 percent. The bond issuer must defer interests payment when both of the following two conditions occur, i.e. the sum of surplus reserves and retained earnings in the latest audited balance sheet is negative; and common stock holders have not received any cash dividends within the recent 12 months. The bond issuer shall pay interest arrears and relevant compound interests immediately when the conditions for deferred interests payment do not exist.

 

In case that the bond issuer is in liquidation process, the principal and interests of hybrid capital bond shall be paid junior to common and subordinated debt but senior to equity capital.

 

Upon the maturity of hybrid capital bond, the bond issuer may defer the payment of its principal and interests if the issuer has already (or after such payment) been unable to pay claims of higher priorities. Once the financial situation becomes better, the bond issuer shall continue to service the debt, and interests thus paid shall be calculated based on the coupon rate of the hybrid capital bond.

 

II. To issue the hybrid capital bond, a commercial bank shall meet the requirements in the Article 7 of the Management Rules, and submit relevant application documents to the People's Bank of China in line with the Article 10 of the Management Rules, together with information of capital adequacy ratio and other debt services in the last three years calculated according to supervisory authority's requirement.

 

III. The bond issuer may choose public offering or private placement to issue the hybrid capital bond. The bond issuer shall disclose its performance, capital adequacy ratio and debt service information in recent three years calculated in line with supervisory authority's requirement.

 

IV. The hybrid capital bond issuer shall provide risk warning statement in its Prospectus and Issuance Notice, focusing on its settlement priorities, and risks of deferred interests payment before maturity and deferred principal and interests payment at maturity.

 

V. The public offering and private placement of hybrid capital bonds shall both be subject to credit rating. In the duration of a hybrid capital bond, a credit rating agency shall conduct follow-up credit rating on a regular and non-regular basis, issue a follow-up rating report every year and release follow-up rating information every quarter. The credit rating agency shall promptly provide a follow-up rating report upon the occurrence of a major event that may affect the issuer's debt service.

 

VI. In the case that the issuer retires the hybrid capital bond before maturity according to the call provision, defers interests payment or payment of principal and interests due at maturity, the issuer shall report to the People's Bank of China five days in advance for a record, and make public disclosure at www.chinamoney.com.cn and www.chinabond.com.cn. These occurrences shall also be disclosed in the financial statements of the year as a major accounting event.

 

VII. During the duration of a hybrid capital bond, the issuer shall disclose financial information on a quarterly basis. If the hybrid capital bond is offered publicly, the issuer shall, at the time of interests payment, disclose information on capital adequacy ratio and service of other debts. A listed commercial bank shall also disclose information on dividend payment of common stocks.

 

VIII. Investors of hybrid capital bonds are expected to fully understand and take the risks associated with investment in hybrid capital bonds. Investor should be supported by a written approval from its decision-making body designated by the chart of association or document of a similar nature and reported to the National Inter-bank Funding Center for a record.  The written approval shall state that the investor is aware of the risks associated with hybrid capital bond and has internal control and risk management capability to deal with such risks.

 

IX. The volume of issuance of hybrid capital bonds and how to include its proceeds in supplemental capital shall be regulated according to the rules issued by the supervisory authorities.

 

X. Matters not covered by this Announcement shall be regulated by the Management Rules. 

 

Source: www.pbc.gov.cn