While the Development Bank of Singapore (DBS) has twice used subordinated debt to re-balance its capital base, Bank of East Asia's (BoEA's) $550 million deal marks the first time an Asian bank has used such a structure to re-finance capital depleted through an acquisition, in this case First Pacific Bank (FPB).
The successful completion of the 10 non-call, five lower tier 2 deal means that the bank has been able to boost capital adequacy ratios from marginally under 15% back up to19%, with tier 1 capital has staying constant throughout at 13%. Hong Kong banks maintain some of the highest capital ratios worldwide and as a result of the deal, BoEA will now be able to enjoy a more advantageous mix - with increased tier 2 and static tier 1 improving its return on equity.
Priced under the lead of bookrunner JP Morgan and co-manager Barclays Capital, the deal was increased by 10% from $500 million. With a fixed re-offer price of 99.5, the Baa2/BBB-rated issue carries a semi-annual coupon of 7.5% to yield 7.622%, or 187.5 basis points over Libor. In Treasury terms, this equates to 281.5bp, with five-year Treasuries standing at 4.807% at the time of pricing.
Compared to Dao Heng Bank, against which BoEA has inevitably been benchmarked, the deal came at a 21bp premium, in line with expectations. Yet throughout, the former's outstanding 2007 bond has been regarded as an inadequate reference point by the lead because of its illiquidity. Over the course of roadshows, spreads consequently moved in about 10bp, as traders began to mark their prices tighter as the strength of demand for Hong Kong sub debt became more clear.
Syndicate officials believe that BoEA's achievement in setting a new benchmark for Hong Kong bank credit is also all the more remarkable because of its relatively small asset base ($22 billion), of which the new deal represents 2.5%.
"A number of investors asked us whether a bank of this size had ever raised so much capital before and looking back over the records, we couldn't find one that had," notes one banker. "In both Europe and the US, banks with BBB ratings tend to raise about $100 million to $200 million at any one time and build up tier 2 debt more gradually."
The size factor was said to have particularly worried a number of US accounts, a large percentage of whom also found the idea of paying sub 300bp unattractive. "There were a number of investors that couldn't get over the 300bp psychological hurdle," the banker continues. "Even though BoEA comes under a well-regulated banking jurisdiction, they just thought the spread was too aggressive for a bank with exposure to China and especially one that was planning further rapid expansion on the Mainland."
Had the lead priced these orders into the deal, it says it would have had a book topping the $1 billion mark. Stripping them out, it was left with about $700 million in total orders, of which 58% came from Asia, 25% the US and 15% Europe. Asian demand nearly topped 60% and would have done so had two US accounts not come in as the deal went into pricing with orders for $20 million and $25 million.
From the beginning, the region had been expected to contribute a much higher percentage than has been seen in past sub debt deals, which have largely been driven by the US. The final figure was, nevertheless, still surprisingly high.
"It shows that Asia can start to be a little bit more independent with its bond deals," one player argues. "For deals around the $300 million mark, local borrowers probably no longer need the US or Europe, because the entire amount can be placed in the region. Those around the $500 million mark and above, on the other hand, still need outside help, although they can use the growing influence of Asian investors to generate better price tension and get rid of the new issue premium typically demanded by US accounts."
A total of 75 investors participated and of those that did from Asia, 75% came from Hong Kong and most of the rest from Singapore, although there was also said to be a smattering of interest from Taiwan.
In terms of overall investor type, retail comprised 45%, followed by banks 30%, asset managers 15% and insurance companies 10%. Final allocations, however, placed slightly more emphasis on institutional placement.
"There was strong interest from the private banking sector in Hong Kong, Switzerland and the US," a banker comments. "But this was not so much because BoEA was offering subordinated debt, as the fact that it is a Hong Kong credit. The deal had scarcity value and many of this investor type don't have the exposure they would ideally want in the Territory."
For many Hong Kong banks, the deal would have been the first that many had bought from the sector. As one outside observer puts it: "They know the name and because most local banks here are so well capitalized, there's no real pressure on their ratios if they pick up paper. Chinese banks will also be keen, but mainly because they never pay much attention to BIS standards."
The deal also was a strong beneficiary of its timing. Having planned the offering since last October, BoEA found itself perfectly positioned to take advantage of a bull market propelled by the Federal Reserve's first surprise interest rate cut at the very beginning of the year.
"When we first heard about this deal at the tail end of last year, we thought that $300 million might just about be feasible as long as a deal was priced at a margin to Dao Heng," a second banker remarks. "Come early January and the sudden rate cut which led to a scramble for yield, the deal seemed like a godsend. Over the last week of so, the overall market tone has become more lukewarm, but the offering still seems to have done well."
In part, this stems from the fact that there is only a very slim new issue pipeline behind it and certainly not from the BBB sector. One banker concludes: "Other markets have become clogged as issuers have taken advantage of conditions to launch a series of jumbo deals. This has hardly been applicable in Asia where it takes months to coax an issuer out."