In an unusual move, JPMorgan has swept into the forthcoming financing for UOB, as it seeks to buy Singapore's fourth biggest bank, OUB.
This is something of a coup, especially given that Merrill Lynch did the successful M&A advisory for UOB. Merrill put in place the bridge loan that Singapore regulations make necessary, a fact that would suggest it would have gained sole books in the financing. (In Singapore, banks must pre-fund the acquisition of other banks, under Monetary Authority of Singapore regulations.)
A roadshow will be held on Friday for the Singapore dollar bond, which is expected to be a minimum size of S$750 million, but could be as large as S$1 billion.
The deal follows a spate of issuance from Singapore banks. Most critically for UOB, OCBC launched the biggest ever Singapore dollar bond to fund its acquisition of Keppel Capital. This could prove problematic for UOB and its lead managers. The biggest buyer of paper in Singapore are the 20 or so insurance companies, and in the OCBC transaction they accounted for 75% of the demand, with 15% coming from private banking clients and the remainder from asset managers.
The fact that the insurance companies have bought so much OCBC paper will give these institutions a great deal of leverage when the price discovery process goes on during Friday. The issue for UOB will be cost. Some local bankers reckon UOB will have to price 25bp wide of OCBC if it wants to get the deal away.
Regardless of anything else, UOB will probably have to pay a premium thanks to the innovative structure it is employing. In a first for Asia, it will launch its deal as a 15 year bond, with a call option after 10 years. Typically investors require a 15bp premium (over a 10 year bullet) in other markets to buy this structure.
The structure is, however, preferable from a regulatory capital point of view. That is because the 10 year bullet structure employed by OCBC and DBS has an average maturity of 7.5 years from a regulatory capital perspective because the bond amortizes after five years. The 15 year bond has a 10 year regulatory capital life thanks to the fact that it has the attached call option.
However, in practice the issuer normally chooses to call the option after 10 years, because the step-up makes the pricing prohibitive. Investors, however, demand a premium for buying the structure.
Pricing will also be an issue because the deal will follow OCBC's example and be structured as a book built transaction: this means it will not be like most Singapore dollar bond deals where a firm underwriting is followed by the lead manager putting large amounts of unsold inventory on its books.
However, if the price discovery process makes the deal too expensive, UOB is under no time pressure to issue right now and could cancel the transaction. That is because JPMorgan will replace the Merrill Lynch bridge loan, thus giving the Singapore bank maximum flexibility in its issuance schedule. Such bridge loans typically give a three to four month window before the pricing of the bridge steps-up to prohibitive levels.
JPMorgan will share books on the UOB bond with UOB Asia and Merrill Lynch.
And as to OCBC, its Singapore dollar issue came to market at 5% and is currently trading at a 4.83% yield. This only serves to illustrate the fact that the insurance companies that bought the deal have no interest in trading it and have thus made the bond extremely illiquid within weeks of its issue.