Horizon is also raising a three-
year onshore loan of Rmb1.8bn
(US$184m).
Chinese leasing companies
present a seductive growth
story for lenders. Leasing units
of Chinese banks, with ratings
from Fitch, grew their assets at
an average compound annual
growth rate of 21% between 2011
and 2016, the rating agency said
in a report last May.
In a separate report later last
year, Fitch said the sector and
rating outlooks for Chinese
leasing companies were stable,
reflecting continued sovereign
and institutional support, and
expanding growth and funding
opportunities.
However, some lenders in the
retail syndication market are
warning that they are nearing
their lending limits.
“Our exposure to the leasing
industry has almost hit the
internal limit, as we have been
very supportive of leasing
companies in the past few years,”
said a loan banker at a Taiwanese
bank in Hong Kong.
India bends sub debt rules
Bonds Regulator makes exceptions for state-owned insurers in need of capitalBY KRISHNA MERCHANTIndian state-owned insurance
companies are getting a
pass from regulators to raise
subordinated debt as the
government prepares to enlist
them in a bid to extend health
coverage to half a billion poor
people.
Whereas the Indian banking
regulator has repeatedly
relaxed requirements to make
it easier for all banks to make
payments on their Tier 1
capital securities, the insurance
regulator has been granting
exemptions on a case-by-case
basis to specific state-owned
general insurers.
UNITED INDIA INSURANCE (UIIC)
raised Rs9bn (US$141m)
from a maiden offering of
subordinated bonds, pricing
the 10-year non-call five notes
at 8.25%. Crisil, which assigned
a AAA (stable) rating to the
deal, said this took into account
forbearance from the Insurance
Regulatory and Development
Authority of India, which
allowed UIIC to service interest
throughout the life of the
instrument, irrespective of
its solvency ratio. Brickwork
assigned an identical rating to
the instruments.
Normal IRDA rules do not
allow insurers to make interest
payments on such securities
if their solvency ratio is below
1.5.
UIIC was able to issue
subordinated bonds
even though its reported
solvency ratio was 1.08 as
of last September, below
the minimum regulatory
requirement, because
of a deterioration of its
underwriting performance,
according to Crisil. The ratio is
expected to rise above 1.5 after
the fundraising, according to
Icra.
IRDA has also allowed UIIC
to issue subordinated debt
equivalent to 50% of its net
worth, above the 25% limit forother insurers.
Last March, NATIONAL INSURANCE
raised Rs8.95bn from 10-
year subordinated bonds at
8.35% after similar regulatory
forbearance was granted to the
company.
“The rules are rewritten by
the regulator for insurance
companies, which are
facing losses, because these
relaxations are not given to
private sector companies,” said
a source away from the UIIC
deal.
UIIC reported a net loss of
Rs19.13bn in FY17 compared to
a profit of Rs2.21bn in FY16.
“It is a practical solution for
a government, which is under
fiscal deficit stress,” the same
source said.
Since July 2016, 11 insurance
companies have raised Rs28bn
from subordinated bonds,
according to Prime Database,
after the regulator issued
guidelines allowing them to tap
the Tier 2 market.
“State-owned insurance
companies will find
subordinated bonds an efficient
avenue to shore up solvency
ratio at a relatively cheaper
cost, as compared to raising
equity capital,” said Krishnan
Sitaraman, senior director at
Crisil Ratings.
“While reported solvency
ratios of some state-owned
insurance companies are low,
they have equity investments
that have substantial unbooked
appreciation. If required, they
can sell some of their equity
investments and realise the
gains on their books, which can
help enhance their reported
solvency ratios,” he said.
The adjusted solvency ratio
for UIIC was 2.13 as of last
September, according to Crisil.
UIIC’s issue found tepid
demand, however, and was
kept open for two days. Life
Insurance Corporation of India
is rumoured to have bought
half of the subordinated bonds,
while public-sector insurancecompanies picked up the
remainder.
Analysts say such cross-
holdings of subordinated debt
among insurance companies
does not necessarily increase
systemic risk.
“This is because the size
of the investment in such
securities is quite small in
proportion to their overall
investment portfolio,” said
Sitaraman of Crisil.
“Subordinated bonds are
of longer tenor. In the Indian
context, investors in longer-
tenor bonds typically include
insurance companies and
pension funds.”FUNDING HEALTHCARE
In the budget for 2018/19,
the government widened its
fiscal deficit target to finance
a sharp rise in spending on
rural areas and healthcare. It
also suggested the possibility
of a mega IPO from the state-
owned insurance sector after
unveiling plans to merge state-
owned general insurers ORIENTAL
INSURANCE, National Insurance
and United India Insurance for
a listing as one entity, without
indicating the timeframe.
The government also
announced a plan to provide
health insurance to 500 million
poor people, which would
require an estimated Rs110bn
in federal and state funding
each year. Government health
insurance companies have
agreed to fund this programme,
according to a Reuters report.
Many bankers believe that
raising subordinated debt
will eventually pave the way
for state-owned insurance
companies to merge, list and
fund the massive healthcare
programme.
Among other public-sector
insurance companies, Oriental
Insurance has been talks with
bankers to issue subordinated
bonds. It has yet to make an
official announcement on the
plan. International Financing Review Asia February 10 2018 11
For daily news stories
visit http://www.ifrasia.combanker noted that the precedent
had made investors think for the
first time about the possibility
of never getting their principal
back.
With Jilin Forest’s perps
becoming ever more equity-
like over time if they are not
redeemed, fund managers could
find themselves in violation of
their investing mandates if they
hold them in their portfolios, he
said.
“It [the Jilin Forest incident] is
a disaster for perpetual bonds,”
said the DCM banker. “Investors
are definitely rethinking about
such notes and will ask for more
premiums.”
Market participants expect
onshore perpetual bond issuance
to decelerate and potential
issuers to be limited to top-
quality state-owned companies,
which are under government
orders to reduce their debt levels.
Jilin Forest held a bondholder
meeting last Friday behind closed
doors to discuss the decision not
to call the bonds. The company
declined to comment.