DBS attracts record crowd

The simultaneous Singapore dollar-denominated issue, which was viewed by the bank as a means of further developing the domestic bond market, similarly attracted healthy demand, with books closing three times oversubscribed at the S$300 million level. Led by DBS, Goldman Sachs and Morgan Stanley Dean Witter, the domestic tranche was priced at par with a coupon of 5.35%, stepping up to 252bp over the Singapore swap offer rate if the deal is not called in year 10.

At this level, the deal came at parity to the dollar offering, which was also priced at par, with a coupon of 7.657% to yield 280bp over Treasuries, or about 180bp over on a Libor basis. If the deal is not called in 2011, the coupon steps up to 320bp over Libor.

Final pricing reflected earlier price talk at the 280bp level, but came 5bp outside of expected levels at Asia's close. The slight widening was initiated to support early secondary market trading in a rocky global market, where plunging equities sent the Dow Jones Index below the 10,000 level for the first time in five months yesterday.

Relative to the bank's existing dated upper tier 2 debt, bankers and industry analysts conclude that pricing is fair. DBS's two outstanding subordinated debt issues comprise: a $7.875% August 2009 issue, and a 7.875% April 2010, trading at 190bp bid at the time of pricing. Accounting for the one-year maturity differential - worth about 5bp, according to bankers - the deal came at a premium of 85bp, in line with expectations.

Some bank capital experts have previously speculated that the deal might come more than 100bp wider than DBS's existing two deals because of the perpetual nature of the new offering. Normally, the only difference between upper tier 2 and hybrid tier 1 is the fact that the former is cumulative and the latter non-cumulative.

However, others point to the example of HSBC, which has both dated upper tier 2 due July 2009 and hybrid tier 1 due June 2010. Its tier 2 deal was said to be trading at the 150bp level at DBS’s launch and its tier 1 at the 246bp level, a 96bp differential.

Despite the fact that DBS has a subordinated debt rating one notch higher from Moody's at Aa3/A- compared to HSBC's A1/A- rating, bankers say that investors would always expect a roughly 40bp differential between the two banks because of the latter's sheer size and global standing. In terms of their respective financial ratios, however, the two share many similarities.

Both have extremely high capital ratios relative to global standards. At the end of 2000, DBS had a total capital adequacy ratio of 18.9%, of which 14.5% comprised tier 1 equity. The new deal adds a further 1.95%, bringing it back above the 20.1% level it recorded at the mid-year point.

HSBC currently has a 13.3% level and because it has a higher ratio of tier 2 capital to tier 1, has been able to maintain a higher return on equity of 19% to DBS's 12.9%. In the same way, it commands a lower ratio of equity-to-assets at 6% versus DBS's 10%. Where cost-to-income efficiency ratios are concerned, however, the roles are reversed, with DBS standing at 40% and HSBC at 55%.

Pricing of the DBS transaction was also affected by a decision to achieve greater diversification and allocate the deal in favour of more price-sensitive US investors, despite the fact that Asia overwhelmed the book. Indeed, some bankers believe that had the bank opted to weight allocations in favour of its home region it could have bought pricing down by at least 10bp. Geographical splits saw 40% placed in Asia, 17% in Europe and 43% in the US.

In Asia, 80% of orders by size came from the private banking sector and even more by number. Many of the accounts are also said to be Hong Kong-based as well as from Singapore. In the domestic tranche, bankers further add that private banks account for 25% of the total, with insurance companies taking 50% and asset managers the remaining 30%.

The weight of private client orders was said to have made the allocation process a big headache and led to a slew of complaints and allegations of favouritism against one of the lead managers. Part of the problem stemmed from the fact that banks often close their order books to private clients once a deal has been fully subscribed. As one explains: "I'm not surprised a number of clients are hopping mad because the private banking side always submits orders for the exact number of bonds they want and don't expect to get scaled back. A big institution, on the other hand, will submit a $50 million order in the full knowledge that it will only receive $10 million."

Other bankers, however, say that it was hardly possible to close off orders in a deal where the momentum was being driven by the private banking side. It was also impossible to upsize the deal further because $725 million represents the upper limit of hybrid securities DBS can maintain on its balance sheet.

The main reason for the strength of demand is said to lay in the attractive yield offered by the bond. "There was no sensitivity to the subordination aspect," says one banker. "Investors were purely attracted by the combination of quality credit and high yield. The deal was viewed as a high yielding, long-term, fixed rate deposit."

An analyst further adds: "It shows that in a volatile environment, we are once again seeing investors stick to top quality names, but also trying to chase that extra bit of yield. If this then means going into tier 1 to do it, their attitude is so be it."  

For some observers, DBS's rationale for doing a deal still remains unclear unless it is preparing to make a large goodwill write-off against tier 1 equity, as the transaction will weaken its capital base over the short-term. Having now raised $782 million, they also argue that the acquisition underlying the write-off will need to be substantial.

 "There could of course be a more prosaic reason," one adds. "This is a bank which is determined to be seen as a leader in Asia. Therefore, being able to say that it's done the first tier 1 perpetual from Singapore might seem important whether the deal actually makes sense or not."

The general consensus, however, says that introducing hybrid securities into the bank's capital mix makes perfect sense from an accounting standpoint, since it is more tax efficient. More importantly, supporters emphasize that the move has to be viewed as one step of an ongoing process.

DBS has made no secret of the fact that it is on the acquisition trail and has also said that it will return equity to shareholders if it does not make those acquisitions. During roadshows, investors were told that the bank is committed to establishing a share buy-back scheme for up to 10% of its common equity and may redeem the non-voting preference shares held by the government, which boost the state from a 34.5% stake to 39.1%.