Dah Sing Bank sold a $225 million Basel III-compliant Tier 2 subordinated bond on Wednesday – Asia’s first for the year and third ever to be issued in dollars – setting the stage for more to come as investor familiarity towards such structures improves.
The deal is a close replica – with minor tweaks – to China Citic Bank International’s Basel III Tier 2 note issued in late October, which sought to address investor fears over such structures by making it more investor-friendly. These two transactions were built on the weak foundation of ICBC Asia’s Tier 2 paper issued in early October that immediately underperformed on the first day of trading.
The small change in Dah Sing’s transaction is with regards to the callable nature of the note, where it is callable in the fifth year and at each coupon payment thereafter. Citic Bank’s is only callable once – 5.5 years after being sold, highlights a source close to the deal.
“The Basel III Tier 2 space in Asia is clearly hitting its stride,” said the source. “While the structure remains the same [as Citic’s], we see better investor response on these deals as the structures are being well established.”
As a result of the positive response towards such structures, credit analysts and syndicate bankers alike believe that the volume of Basel III Asian bank capital will increase this year as financial institutions look to refinance old-style Tier 2 paper and build up Additional Tier 1 (AT1) buffers in their capital structures bonds, although redemptions in dollar bank capital is relatively low.
For example, Morgan Stanley estimates in a report published in early January that less than $5 billion will be redeemed annually in the coming years.
“As pricing precedents have emerged with recent deals, we believe that it’s likely we will see more deals emerge as we go into 2014,” said Desmond Lee, Asia bank credit analyst at Morgan Stanley. “Notwithstanding low redemption requirements, the capital lost every year under Basel III’s grandfathering arrangements could motivate banks to issue.”
The most likely issuers will be Indian and Chinese banks, given their low capital ratios to start with combined with material amortisation.
Singaporean, Japanese and some Malaysian financial institutions with high amortisation of capital are also likely candidates, although this will be partly offset by strong capitalisation, implying that the banks may decide to allow their total capital base to fall rather than fully replacing non-qualifying capital, highlight credit experts.
Dah Sing’s pricing
Because of the growing investor acceptance towards such transactions, the Hong Kong-based bank’s deal – which has a coupon of 5.25% – priced very aggressively, having come in by 25bp from an initial price guidance of Treasuries plus 400bp area, according to a term sheet.
The nearest comparables for the Tier 2 note are Dah Sing’s old-style paper, plus that of its competitors including ICBC Asia and China Citic’s – both old- and new-style, say sources.
For example, ICBC Asia and China Citic’s old-style 2020s were trading at Treasuries plus 255bp and 357bp respectively, which is a G-spread of 194bp and 310bp, at the time of pricing. Meanwhile, Dah Sing’s old-style 2020s were trading at Treasuries plus 285bp, which is a G-spread of 249bp. This indicates that Dah Sing’s Basel II notes sit smack in the middle of ICBC and Citic’s, suggesting that it should be the same for its new-style notes.
ICBC Asia and China Citic’s new-style 2023s and 2024s were trading at Treasuries plus 340bp and 422bp respectively, which is a G-spread of 350bp and 411bp at time of pricing. The mid-point between that would be around 380bp above Treasuries – which was the fair value of the Dah Sing’s transaction.
“That’s where most people saw fair value but because the issuer is very well-known and well-liked in Hong Kong plus the transaction’s small size and rarity factor, we were able to press the final outcome inside of fair value,” said a source.
Dah Sing’s transaction achieved an order book of $1.9 billion from 111 accounts. Asian investors were allocated 88% of the deal, while the rest went to European investors.
The deal also received strong institutional support – which wasn’t there for previous Basel III Tier 2 transactions. Funds bought 41% of the notes, followed by private banks with 29%, insurance companies with 9%, financial institutions with 19% and corporates with 2%.
In secondary markets, the bond has tightened by 10bp to trade at Treasuries plus 365bp.
Unlike ICBC Asia and Citic Bank’s Basel III Tier 2 notes, Dah Sing received an additional issue rating from Moody’s of Baa2, which is an investment grade rating. Fitch rated the transaction BBB.
Dah Sing’s notes have solo recognition just like Citic’s, meaning that the debt is qualified as Tier 2 capital for the bank itself, unlike ICBC’s, which was structured to achieve capital recognition for both the financial institution and its parent.
Additionally, Dah Sing’s capital recognition guidelines are governed by the banking capital rules of Hong Kong while the point of non-viability (PONV) – a trigger where investors could lose all their money if regulators decide the bank cannot survive – is based on the Hong Kong Monetary Authority’s (HKMA) discretion.
“Investors are comfortable with the HKMA regulator. That really came across in the meetings and it’s a big plus for this market,” said a source. “People also feel that the Hong Kong banks are very well regulated and a stable sector.”
Citi and HSBC were the joint bookrunners of Dah Sing’s deal.