UOB completed its second international bond offering in as many weeks on Wednesday with a new $500 million lower tier-2 (LT2) deal that replaces legacy capital maturing next month.
Singapore's third largest bank by assets has had an active start to the year after completing a debut €500 million covered bond last week, the City State's first euro-denominated deal of the year.
The new A2/A+ rated, Reg S transaction also represents Singapore's first dollar-denominated deal of the year and received a relatively warm reception from investors, with the order book building from $750 million within a few hours to a peak order book of $1.5 billion by Asia's close.
This is nowhere near the $4 billion level UOB achieved in March 2014 when it completed South East Asia's first Basel III compliant offering. However, syndicate bankers viewed it as a good result, considering the bond markets are only just starting to stabilise following two months of volatility.
"We've had a fantastic rally recently and that’s now settled down a bit," said one banker. "But the market is still trading sideways so this was a pretty good day to come."
The banker added that investors always like paper from Singaporean banks even though yields are trading at very tight levels. "They view Singapore as a safe haven, with none of the issuers surrounding some of the European banks and their ability to meet their coupon payments," the banker added.
Initial pricing for the 10.5-non-call-5.5-year deal was pitched at 235bp over Treasuries ahead of final pricing at 99.574% on a coupon of 3.5% and yield of 3.586% or 220bp over Treasuries.
Syndicate bankers calculated fair value around the 215bp mark, which implies a new issue premium of roughly 5bp.
This is based on UOB's outstanding Basel III-compliant issue: its $800 million 3.75% issue, which priced in March 2014 and has a September 2024 maturity with a 2019 call option.
Syndicate bankers quoted a spot G-spread of 199bp on Wednesday, although other non-syndicate bankers quoted it roughly 4bp lower around the 195bp level. In price terms, the deal has traded down about one point since an early February high around the 102.95% level.
Taking the Chinese and Australian credit curves as a comparison syndicate bankers said the additional one-and-a-half-year maturity was worth about 15bp.
However, the two deals are not fully comparable since the outstanding Basel III-compliant transaction has a BBB rating from Standard & Poor's, three notches lower than the Moody's LT2 rating on the new deal and four notches lower than Fitch's rating.
A second point of comparison was OCBC's $1 billion 4.25% June 2024 LT2 bullet deal. This was being quoted on a G-spread of 204bp yesterday.
"A callable deal should normally come about 10bp back so that also brings fair value out to 215bp" one banker commented.
Final demand closed at the $1.1 billion level with participation from 100 accounts. Demand was unsurprisingly led by Asia taking 90% with Europe on 10%. By investor type fund managers took 54%, banks 25%, insurers 11% and private banks 10%.
The Singaporean banks are trading at much tighter levels than their peers across the rest of Asia including Australia where ANZ has just begun roadshows for a LT2 deal at the high 200bp level.
They are also trading much wider than European banks such as Deutsche Bank whose Ba1/BB+ rated $1.5 billion 4.5% 2025 LT2 bullet deal was being quoted at 6.5% yield on Wednesday.
Fitch rates Singaporean banks LT2 debt one notch down from senior unsecured debt. However, Moody's notches them down four levels on the grounds that the Monetary Authority of Singapore (MAS) has not specified what level it determines a bank's Point of Non Viability (PONV).
Under Singapore's legislation, the MAS determines the point at which a loss absorption event has occurred and also how much of subordinated debt a bank needs to write-off after it has fully written off its Additional tier 1 debt.
UOB currently has the lowest Capital Adequacy Ratio (CAR) of the three main banks. At the end of 2015 it reported an overall CAR of 15.6%, with Tier 1 standing at 13% and 11.7% based on the new rules effective January 2018 (CET 1).
By comparison, DBS has a CET 1 ratio of 12.4% and OCBC 11.8%.
Oil and gas loans
All the Singaporean banks are well capitalised, although Moody's flagged their oil and gas exposure in a recent ratings report.
"The banks have seen a broad-based deterioration in asset quality through 2015, a trend we expect to continue because of slowing economic and trade growth in Asia, and increasing stress for oil and gas borrowers in Singapore," said vice president Eugene Tarzimanov.
When it presented its recent full year results, UOB said it S$7.7 billion ($5.5 billion) in exposure to oil and gas names or 3.7% of total loans. This is lower than OCBC and DBS on 5.9% although equity analysts commented that most of the DBS loans are to deep-water operators, which are less likely to get into trouble.
During its results presentation, UOB said that roughly 20% of the oil and gas loans would be vulnerable if oil prices remain low during 2016.
Non-performing loans are starting to tick up, with UOB reporting a 1.4% level at the end of 2015 compared to 1.2% in 2014.
Since the new Basel III regulations were introduced, UOB had raised a total of $1.1 billion prior to the new deal compared to $600 million from DBS and $3.1 billion from OCBC.
Its four outstanding Basel III compliant deals comprise: an S$500 million 4.75% perpetual, callable in 2019 and an S$850 million 4.9% perpetual callable in 2018. It also has an S$500 million 3.5% LT2 deal callable in 2020, in addition to the $800 million deal which is callable in 2019.
This year its S$1 billion 3.45% Basel II deal is callable in April and its $500 million 5.796% perpetual is callable in December.
Joint global co-ordinators for the new issue are: ANZ, Citi, Credit Suisse, HSBC and UOB. This is the same syndicate as the March 2014 Lower Tier 2 deal with the addition of Citi.
This article has been updated since first publication with final distribution stats.
