DBS: subordinate to no-one

Singaporean bank achieves super tight pricing on first subordinated debt deal in three years.

DBS returned to the upper tier 2 market yesterday (September 23) with a $750 million 15 non-call 10 deal via lead manager Morgan Stanley and joint lead DBS. Pricing came at the very tight end of indicative terms on an issue price of 99.7% and coupon of 5% to yield 5.037% or 105bp over Treasuries.

Bankers calculate the Libor spread to be 61bp over, an incredibly steep 15bp differential relative to the main benchmark provided by UOB. This was said to have been trading at 76bp over Libor at the time of pricing.

However, different banks were quoting a range of asset swap margins yesterday. Some banks, for example, estimated the new issue spread to be more like 64bp over Libor, which still represents an aggressive 12bp differential to UOB.

The difference stems from varying opinions on the steepness of the Libor curve in the one month since UOB completed its own $1 billion 15 non-call 10 upper tier 2 deal. The lead, for example, used a 44bp asset swap margin to calculate the spread for DBS and 42bp for UOB.

The latter widened 2bp yesterday to close Asian trading at 118bp over Treasuries. In August, the deal was priced on a coupon of 5.375% to yield 114bp over Treasuries and 67bp over Libor.

In the run up to pricing, non syndicate bankers concluded that any Libor spread north of 10bp through UOB would be extremely impressive. Key will be if the deal holds up during secondary market trading. If it does, both DBS and Morgan Stanley will be able to congratulate themselves on an outstanding job.

Whether it was a renumerative job, on the other hand, remains open to question. Rumours were rife yesterday afternoon that the lead was being paid only 10bp. If this proves to be correct, it would set yet another unhealthy precedent for Asia's fiercely competitive debt capital markets.

Bankers have long accepted low fees from Asian sovereign issuers because government officials need to justify pricing to an electorate that may be capital markets illiterate. However, they have held onto the hope that Asia's most sophisticated borrowers understand the need to pay a fair return if they want the lead to support the deal properly during secondary market trading.

Morgan Stanley says that 10bp is not the correct fee, but will not be publicly disclosing the level on the 144a transaction. Co-managers Deutsche Bank, Goldman Sachs, JPMorgan and UBS will all receive some fees for the deal, but no bonds.

In 2001, DBS paid 65bp for its last outing to the subordinated debt markets, while UOB recently paid 17.5bp for its deal.

In a bid to make sure the transaction performs well, DBS decided not to upsize it. The order book closed just over two times covered, with 95 accounts allocated.

By geography, the US accounted for 57%, Asia 27% and Europe 16%. Of the Asian demand, about 75% came from Singapore.

By investor type insurance and pension funds took 55%, asset managers 20%, banks 15% and private banks 10%.

Specialists say the biggest hurdle the Aa2/A+/AA- (Fitch) rated bank faced was UOB, which has the same three ratings from the international agencies. Its most recent deal is trading out of sync with both the DBS curve and its own outstanding July 2013 bond.

Morgan Stanley has spent the past two days telling fund managers that UOB has underperformed the sector because traditional fund managers were on holiday when the deal was priced in mid-August, so trading accounts were given a heavy allocation and are now long the paper.

Other FIG specialists argue that UOB has widened marginally because of supply pressures from DBS and OCBC. As one puts it, "The UOB bond was big and liquid so it was the most obvious one to hit the bid on. All the existing DBS bonds are bid at 117% to 120% so no-one was going to touch them."

What is certain is that both UOB and DBS have secured extremely attractive funding levels. The current deal marks the first DBS has been able to price through 100bp over Libor.

Even as recently as May, the DBS May 2011 bond was trading at 70bp over Treasuries and 65bp over Libor. Yesterday it was bid at nearly half these levels with a bid quote of 37bp over Treasuries and 39bp over Libor.

A year ago when UOB re-opened the sub debt sector for the first time since 2001, the DBS 2011 was trading at 82bp over Treasuries and 94bp over Libor on an inverted curve.

Trading levels of both DBS and UOB may also be buoyed by the news that OCBC is intending to tap the domestic rather than international sub debt sectors. The bank has mandated Deutsche Bank and JPMorgan for a S$500 million issue, which is expected to launch over the next couple of weeks.

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