DBS issues Asia's largest bank capital deal

The dual-tranche transaction achieves an unprecedented vote of confidence from US and European investors.
DBS Group priced the largest bank capital deal ever completed in Asia on Friday, issuing a total of $2 billion of bonds in a Reg-S, 144a dual-tranche transaction. Singaporean guidelines supporting the issuance of upper tier-2 and hybrid tier-1 bonds were recently expanded to include lower tier-2 bonds as well. So the DBS deal also marks the first transaction in this format out of Singapore.

ôThe size and the spread of this latest deal are off the chart,ö says one source.

The deal was managed by DBS, Deutsche Bank and JPMorgan.

The deal comprised a 10-year $1.5 billion FRN, and a 10-year $500 million non-call-five fixed-rate tranche, which both priced at the tight end of a guidance set at 22bp-25bp over Libor for the former, and 22bp-25bp over mid-swaps for the latter. The transaction amounts to 10% of the total volume of Asian bonds issued so far this year, which currently stands at $20 billion-equivalent.

The closest comparable in size is OCBCÆs $1.75 billion upper tier-2 10-year dual-tranche bullet-bond managed by UBS in 2001. It priced with a spread of 220bp over Libor, illustrating the fundamental changes that have taken place in the Asian market since then.

Both of DBS' tranches achieved a high geographical diversity, with unprecedented orders coming from the US and Europe. One source says this was the first time that non-Asian investors have embraced an Asian issuer to this extent. Without them, the size could not have been achieved.

Says one investor: ôI think it priced fairly and that itÆs a good outcome so far for both the issuer and the buy-side. Liquidity will be high thanks to the size. This was made possible thanks to the US and Europe, who are asset-hungry and now keener-than-ever to diversify their holdings into Asian credits.ö

Asian investors would not normally buy paper with this rating and spread since funding costs of local institutions are typically higher, even for senior debt.

The FRN, which was rated A+/Aa2/A+ by Standard and Poor's, MoodyÆs and Fitch, garnered $2.2 billion dollars of demand, with 41% selling to Europe, 32% to the US, and 27% to Asia. In terms of investor type, 60% of the bonds sold to funds and asset managers, 38% to banks, 1% to insurance and pension funds, and 1% to retail and private banking. The 22bp over Libor coupon includes a step-up of 122bp from May 2012, with the bonds callable at 100 on May 16, 2012.

The bonds, which priced at par, broke syndicate by a half-point, opening at a bid of 21.5bp over Libor.

The fixed-rate tranche (rated AA-/Aa1/AA-) attracted over $1 billion in demand, closing with a 5.125% coupon and a step-up of 122bp over Libor from May 2012. The bonds are callable at 100 on May 16, 2012. A total of 43 investors participated in the deal with 38% of the bonds selling to the US, 36% to Europe, and 26% to Asia. Fund and asset managers bought 50%, banks 38%, insurance and pension funds 9%, retail and banks 3%.

The fixed-rate bonds also broke syndicate, pricing at 70.3bp over Treasuries and trading now at 70bp.

Bookrunners structured the deal to cater for banks and SIVs, who are big buyers of lower tier-2 bonds and who have a preference for FRNs given their structure. The fixed-rate was ideal for investors such as US asset managers, who generally work with fixed-rate issues.

The deal was announced Thursday, and priced Friday without a roadshow. This allowed bookrunners to take advantage of hopping market conditions, ahead of potential volatility this week following Thursday's FOMC announcement. Last week alone, five Asian deals were issued totalling $4.1 billion dollars.

Morgan Stanley was conspicuously absent from the mandate. This is the first DBS issue in which the bank has not been involved. Last year Morgan Stanley, in an allegedly unprecedented move, was announced as sole bookrunner of a $900 million upper tier-2 offering, despite the fact that the transaction had already been soft-marketed with DBS, Deutsche Bank, and JPMorgan (as well as Morgan Stanley) on the mandate.
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