China's plan to allow commercial banks to issue perpetual debt is credit positive for local banks, their depositors and senior unsecured creditors, Moody's said Jan. 7.
The rating agency's comments came after the Financial Stability and Development Committee, an agency under China's State Council, said Dec. 26, 2018, that it was assessing ways to help banks replenish capital and push for the issuance of perpetual bonds.
Moody's said perpetual bonds, which are classified as Additional Tier 1 securities, will improve banks' capacity to absorb losses as they rank lower than senior instruments in a liquidation. Perpetual bonds will qualify and be counted toward banks' total loss-absorbing capacity requirements, which will take effect on Jan. 1, 2025, if not earlier, according to the agency.
Further, the move will ease pressure on banks' capital and issuing perpetual bonds will widen the pool of potential investors in capital instruments, creating another channel to raise additional Tier 1 capital.