Joint leads Deutsche Bank and Merrill Lynch priced an upsized $1 billion upper tier 2 deal for United Overseas Bank (UOB) late on Monday. The 10 non-call life offering was increased from a $500 million base size after books closed 10 times covered following an accelerated 14-hour marketing period.
Pricing came at 99.96% on a coupon of 4.5% and yield of 4.505%, equating to a spread of 117bp over Treasuries. The leads received fees of only 25bp for the Aa3/A- rated deal, which also incorporated ABN Amro and Credit Suisse First Boston as co-managers.
Observers reported a total of just over 200 accounts in a book, which had a geographical split of 58% Asia, 27% US and 15% Europe. Although there was no investor breakdown as FinanceAsia went to press, FIG specialists believed the deal was not underpinned by Singapore's powerful insurance companies as it swaps out tight on a Libor basis relative to both DBS, OCBC and the bank's own Singapore dollar-denominated issue.
At roughly 80bp over Libor, the deal came about 14bp through similarly rated DBS Bank's 7.125% May 2011 upper tier 2 issue, which was yielding about 94bp over Libor and roughly 82bp over Treasuries at the time of pricing. Against its own 4.95% August 2011 bond it came about 18bp through on a swapped basis.
Bankers said these pricing levels can be explained by an inversion in the swap curve, which means that UOB has been able to secure extremely tight funding levels on an after swap basis. For the predominantly yield buyers, which populated the order book, on the other hand, the deal was felt to have some value on a pure spread to Treasuries basis.
However, given that it was estimated to have come about 8bp through DBS against the interpolated Treasury curve, the deal was nevertheless felt to have priced aggressively and traders reported little secondary market activity on Tuesday. Initially the leads had gone out with spread guidance around the 125bp level, but tightened it down to first 120bp and then 117bp after secondary spreads for both DBS and OCBC tightened in about 3bp to 5bp during Asian trading in the run up to pricing on Monday.
But observers said that the the main problem with using the existing DBS and OCBC transactions as a benchmark is that hit they market in the middle of 2001 and since then, there has been virtually no paper from Singapore. The last dollar denominated deal was a $2.29 billion deal for Singapore Telecommunications in November 2001.
As a result, the existing bank sub debt deals are trading at high premiums, which make them less attractive to investors. The DBS 2011, for example, is currently bid around the 120% mark.
Most analysts believe that UOB has come back to the subordinated debt markets because it intends to make a special dividend payment. Since it first took over OUB in the summer of 2001, it has said that it wants to achieve a better capital mix. All the Singaporean banks are renowned for their high capital cushions, which depress ROE (Return on Equity) and in UOB's case, it was also saddled with a lot of expensive tier 1 equity relative to tier 2 debt.
The bank has said it believes an optimal capital ratio just above Monetary Authority of Singapore's (MAS) 12% minimum ratio would be ideal. As of March 2003, it recorded an overall CAR of 15.4% of which tier 1 accounted for a whopping 12.4% and tier 2 only 3%. ROE has also fallen from roughly 14.1% in 2000 to an estimated 8.8% in 2003.
Typically tier 1 capital costs roughly 9% to 10%, hybrids roughly 6% and tier 2 capital 4.5% to 5%. Clearly it makes more sense to replace expensive tier 1 with tier 2 debt unless risk weighted assets are set to grow markedly, which is unlikely given Singapore's current growth rates.
Analysts also believe the group intends to return cash to shareholders so that the controlling Wee family can use proceeds to acquire Union Overseas Land and Haw Par Corp off UOB. Under MAS guidelines, all banks are being forced to dispose of non-core assets.
