DBS Bank came to market with Asia’s largest Reg-S deal to date when it sold $1 billion of senior unsecured notes late Tuesday night. The five-year bonds pay a 2.375% semi-annual coupon and were reoffered at 99.691 to yield 2.441%. This was equivalent to a spread of 100bp over the five-year Treasury yield.
The bonds have been set to mature on September 14, 2015 and carry an Aa1 rating by Moody’s and an AA- rating by Standard and Poor’s.
DBS had looked to price a benchmark size transaction, which typically means a minimum of $500 million. However, as books opened, it was soon clear to the market that the borrower was after something well in excess of the speculated benchmark.
Prior to announcing guidance, the joint lead managers -- Bank of America Merrill Lynch, Barclays Capital and DBS Bank -- had secured $1 billion of interest. When the books officially opened, orders quickly grew, reaching $2.25 billion within two hours. At that time, initial guidance was put out at Treasuries plus 105bp.
The order books closed at 4.30pm Hong Kong time and guidance had been revised to between 100bp and 105bp over Treasuries and the deal size had been confirmed at $1 billion. Despite the books closing early, the bonds did not price until late Tuesday night when they came to market at the tight end of guidance at Treasuries plus 100bp.
The notes were issued as part of DBS Bank’s $10 billion debt issuance programme, which was launched in June this year. Bonds issued under the programme are limited to the Reg-S format only, meaning they cannot be sold to onshore US investors. However, given the bank's reputation as a high-quality credit and the abundance of liquidity in the region, keeping the pool of investors to Asia and Europe was no dampener to demand. The final demand reached $3.5 billion with orders from more than 250 accounts.
Asian accounts bought 81% of the bonds and European investors took the remaining 19%. Banks were sold 39% of the bonds, funds 37%, central banks 14%, insurance and pension funds 8% and retail took the remaining 2%.
The healthy demand for the bonds was attributed to the scarcity value tied to the credit, with DBS being a debut issuer in the US dollar market. This was also the first international senior bond issued by a Singapore bank since 2004. With this level of scarcity, liquid benchmarks were few and far between.
Given Temasek’s 28% ownership of DBS, it was initially thought that other Temasek-backed companies, such as PSA International, Singtel Optus and ST Engineering, as well as Temasek’s own $500 million bond, could possibly be used as benchmarks. However, none of these was deemed relevant, given the different industry and structure of the notes.
As a result, investors and lead managers turned to Japanese banks that offered the same dynamics -- specifically Sumitomo Bank and Bank of Tokyo-Mitsubishi, which have both printed AA rated $1 billion five-year deals this year.
“We use this group because of the scarcity value,” explained one banker. “There are very few senior unsecured bonds from Japanese banks available in the market and therefore they trade much tighter than other AA rated banks currently out there.”
While not direct comparables to DBS, the existing 2015 Japanese bonds also share the same credit characteristics as this DBS deal.
At the time the deal was announced, the Japanese comparables were trading at a yield spread between 80bp and 85bp over Treasuries.
By comparison, DBS started its first trading day at 99bp. This relatively flat performance was attributed to the weakness in US markets on Tuesday, which caused the Asian investment grade indices to widen by 5bp to 6bp during yesterday’s session.
“The bonds have traded 2bp to 3bp wider, but traders are seeing that accounts are still looking to buy,” said one source. By the end of Asian trading yesterday, DBS was quoted at a spread of 103bp.
Meanwhile, the comparable Japanese notes remained within a range of 80bp to 85bp. This appears to be tighter than the new DBS 2015 bonds, but the Japanese notes are shorter-dated and hence the price differential (Sumitomo matures in July 2015 and Bank of Tokyo-Mitsubishi matures in January 2015).
"The European banking systematic risk and the spill-over effect from Basel III may dampen the short-term bond performance," said Vince Chan, a credit strategist with AmiasBerman. "But DBS’s capital strength and the scarcity of this senior bond structure among AA-rated Asian banks will support the medium outlook of the bond once the short-term hiccup is over".
Riding on the strength of the credit, the lead arrangers didn't feel a need to do a roadshow before hitting the market. “The timing and the quick execution outweighed the benefit of marketing the deal to investors,” said one banker. That in mind, DBS went straight to the market without first going on the road.
However, some of the other issuers waiting in the wings are not in the same position, requiring a roadshow to build investor appetite for the credit. For example, Powerlong Property was expected to end a three-day roadshow yesterday. As yet, there has been no public announcement as to whether the China property developer will come to market.
Also in the pipeline is Korea Finance Corporation, which announced a roadshow on Tuesday. Barclays, BNP Paribas, Citi, Credit Suisse and Korea Development Bank have all been appointed to manage the roadshow, which will kick-off on Friday this week.