DBS prices third upper tier 2 issue

DBS closes the books on its latest $850 million bond issue - a deal that had to get done.

DBS Bank has closed the books on its latest bond deal raising $850 through the issue of 10-year bonds. The bonds carry a coupon of 7.125% and have been priced to yield 195bp over the relevant US Treasury bond. It is the third time in three years that DBS has issued an upper tier 2, 10-year bullet bond.

Bookrunner on the deal was Goldman Sachs, while Morgan Stanley and DBS Bank were co-arrangers. JPMorgan and Merrill Lynch were co-managers on the transaction. Proceeds from the bond deal will be used to pay for DBS Bank's recent acquisition of Dao Heng Bank in Hong Kong. The Singapore bank paid a hefty price tag of $5.37 billion or 4x book for the Hong Kong bank and so needed to raise some funds to finance the acquisition. However, the yield of the new issue at 195bp over Treasuries was bang in the middle of an indicative range of 190bp-200bp.

Indeed, market observers say that this deal had all the hallmarks of a deal that had to get done. The simple structure and relatively generous pricing were matched by a swift roadshow which had a focus on high yield accounts. There was also more emphasis on Asian accounts in this deal than in previous deals by DBS, which had tended to be heavily targeted at US investors.

This was a deal that had to get done prior to the closing of the acquisition of Dao Heng Bank later this summer. As one banker close to the deal remarked: "They had to ensure that this deal was a success as it was M&A driven." That reasoning could perhaps explain why the bond was not priced at the low end of the indicative price range.

Some analysts have commented that the bullet repayment structure, while attractive for investors, is not very capital efficient for the issuer. The regulators will amortize the deal down from year five so the bank will not be able to lend against the full weight of the bond. But such considerations - as well as issues over pricing - are relatively insignificant when compared to the overall purpose of the fundraising. As the banker puts it: "After all, what is 5bp for DBS Bank compared to the [$5.37 billion] they are paying for Dao Heng?"

The new issue comes hot on the heals of last month's tier 1 perpetual issue by the bank. That transaction raised $725 million through the issue of a perpetual non-call 10 offering. The order book for that transaction was $2.8 billion, mainly from private clients and retail who were attracted by the high yield of the security. It is likely that similar demand existed for the new issue.

Constraining the size of the new issue, however, was the requirement for DBS to keep its tier 2 capital to a level of not more than 15% of its total capital base. Therefore, a month ago indications were that the deal would be around $1.1 billion in size. That reduced to around $800 million in roadshows moving up slightly to $850 million when the bank knew exactly how much room it had on its balance sheet. With high demand and constraints on the size of the deal, the yield could probably have been slightly lower. But in the end it was a smart deal driven by the larger strategic needs of the issuer where successful execution was more important than innovation.

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