An Eu400 million ($339 million) offering, representing the final tranche of a triple currency funding, was priced last night (Tuesday) by lead manager UBS Warburg at 20bp wider than the preceding dollar tranche on a like-for-like basis. The completion of the deal brings total proceeds up to the $2.14 billion mark and makes OCBC's upper tier 2 deal the largest bank capital transaction ever from non-Japan Asia.
Booking proceeds ahead of possible new deals from either DBS or UOB leaves OCBC in the enviable position of having financed itself ahead of a potential glut of Singaporean bank capital transactions and cushioned its capital ratios against the impact of the S$4.8 billion ($2.7 billion) Keppel Capital acquisition.
Its pricing and placement pattern also adds further credence to the argument that the most cost-effective route for Asian borrowers lies in maximising the regional bid. Bankers say that by increasing the initial Singapore dollar denominated tranche to the detriment of what were originally three other currencies, OCBC was able to significantly bring down its average cost of funds. As a result of strong domestic demand, plans for a sterling tranche were scrapped altogether and both the dollar and euro tranches were scaled back from original estimates.
Following on the heels of S$1 billion plus deals for Singapore Telecommunications and DBS, OCBC joins an elite club of domestic issuers that have been able to tap the farthest reaches of their own debt market. Most Singaporean deals average S$100 million to S$200 million in size and initially, OCBC is said to have considered S$300 million the upper limits of its ambitions.
The deals ensuing success and oversubscription up to about S$1.25 billion, hints that there is more depth to the market than previously imagined. Some bankers, for example, have argued that the size of OCBC's deal will make it difficult for others to follow suit over the short-term.
The main casualty of the upsized Singapore dollar-denominated deal was a sterling tranche, which was abandoned due to the pricing premium that would have been needed to ensure an adequate size.
Final pricing on the euro deal saw an issue price of 99.61% and annual coupon of 7.25% to yield 221bp over Bunds. A $1.25 billion dollar-denominated tranche, priced in New York on Friday, came at 99.794% with a coupon of 7.75% to yield 240bp over Treasuries. An S$1 billion ($548.85 million) issue, also priced Friday, came at par with a coupon of 5% to yield 136bp over Singapore Government bonds.
OCBC acted as joint lead on the domestic issue and a co-manager on the two international issues. Barclays was also a co-manager on the euro tranche.
Observers report that the euro tranche secured 35 investors, none of which had participated in either of the other two tranches. There was said to be little switch activity and no arbitrage activity. The vast majority of paper went into Europe, which took 85% against 15% for Asia. Most of the demand was also said to be heavily concentrated in northern Europe, particularly Germany, the UK and Benelux, with little retail participation noted.
By contrast, the dollar-denominated tranche followed recent precedent and was more heavily skewed towards Asia, which ate up 51% of paper, compared with 30% to the US and 19% Europe. By investor type, the book was said to break down: asset managers 50%; private banks 15%; insurance companies 7% and banks 28%.
In the Singapore dollar-denominated tranche, only 2% of bonds were placed internationally, with the vast majority of domestic demand driven by insurance funds. Observers report a split that saw 75% go to insurance funds, 7% asset managers, 6% private banks, 6% banks and 7% other.
For all three tranches, there is also a make-whole provision giving OCBC an option to call the bonds should its bid for Keppel Capital Holdings fail. The bank has a window between September 30 and December 10 to call back any or all of the tranches at the greater of a secondary market price of 101%, or a spread tightening of 50bp.
The inclusion of such a provision, while far from standard, is not completely without precedent. "It was designed to give OCBC the utmost flexibility and priced so that investors wouldn't jeopardise their positions in the event of volatile conditions," one observer comments.
For most players, the key consideration was where OCBC priced relative to its main domestic competitor DBS. Coming 45bp behind the latters recent 2011 dollar bond was considered too wide by many. However, while the deal may have come 20bp wide of the market's expectations, it met investors' pricing demands and has stayed stable over the first few days trading.
Observers have attributed three main reasons for the pricing level. Firstly, OCBC's subordinated debt is rated one notch lower than DBS and crucially its rating from Standard & Poor's falls into triple-B territory, which often necessitates an additional premium. Secondly DBS, which carries a sub debt rating of A-/Aa3, benefits from the fact that it is widely considered a sovereign proxy because the Singaporean government remains its controlling shareholder.
Thirdly and most importantly, OCBC secured its large issue size by throwing the net wider and in the process had to bow to the pricing premium demanded by international investors. As one observer notes, "One of the most interesting things that became apparent during roadshows was that DBS had never really penetrated the international markets. All of its deals had been heavily placed into Asia.
"Investors were really not that au fait with Singapore as a borrower and had little understanding of what's been going on in the domestic banking sector. The rapid changes which have unfolded over the past few weeks have created a lot of uncertainty," he adds. "Singapore is also a non-OECD country, which makes a big difference to some international accounts."
The huge wash of paper emanating from the Lion City has noticeably begun to pressure existing spreads. When, for example, DBS priced its first upper tier 2 debt issue in August 1999, it came flat to an outstanding lower tier 2 deal by HSBC.
The difference between upper and lower tier 2 is generally considered to be about 20bp to 30bp and DBS consequently priced a 2009 bullet deal at 200bp over Treasuries compared to a then trading level of 169bp for HSBC. Today, the latter is trading at 138bp over Treasuries, while DBS has widened out from 173bp bid prior to the latest rash of M&A announcements to 193bp over. This now represents a 55bp differential, or a 25bp premium on a like-for-like basis.
For OCBC, the new deal has significantly increased what are already extremely high capital adequacy ratios. At the end of 2000, the OCBC group reported a total CAR of 22.7% and bankers say that following the completion of KCH, the bank should come down to a pro forma ratio of 17.5%.
Most also conclude that conflicting opinions on the exact premium OCBC should pay relative to DBS are fairly meaningless. As one puts it, "If you consider this deal in the wider context of the M&A transaction, 10bp to 15bp really doesnt matter. Its like counting out the cents or rounding out an accounting error. At the end of the day it was a successful capital management exercise."