OCBC launches $1.75 billion bank capital issue

Bank capital transactions continue to take centre stage in Asia''s debt markets, with offerings for OCBC and Citic Ka Wah starting roadshows next week and a jumbo offering for the Bank of China on the horizon.
OCBC will begin roadshows for Asia's largest ever bank capital transaction next Wednesday, with presentations for a $1.75 billion multi-currency upper tier 2 issue scheduled to commence in Singapore. The 10-year bullet transaction forms part of the bank's hostile S$4.8 billion ($2.7 billion) cash bid for Keppel Capital Holdings (KCH) and, unusually, is being launched before OCBC has even won approval from the latter's shareholders.

UBS Warburg, which is advising the bank on its general offer for the group, is sole bookrunner. Winning the deal represents a major coup, particularly since JPMorgan and Merrill Lynch were previously mandated for a $1 billion bank capital transaction, while Goldman Sachs had been OCBC's ratings advisor, as well as its M&A advisor for the disposal of non-core assets and general restructuring.

All three have been effectively discounted, however, because of hardening allegiances to competing domestic banks within the increasingly frenetic Singaporean M&A market. Goldman, for example, recently appears to have become DBS's main house bank, while Morgan Stanley is advising OUB on a potential bid for OCBC. Merrill Lynch, meanwhile, is said to be likely named as UOB's advisor if it bids, and JPMorgan is advising KCH for whom it put together Keppel TatLee.

Similar to a number of UBSW's Asian debt transactions preceding the 1997 financial crisis, the bank has put together a multi-currency approach for the issuer. Preliminary indications suggest that there will be four tranches of dollar, euro, sterling and Singapore dollar denominated paper, with final sizing to be determined subject to demand at the end of the roadshows.

On completion of presentations in Singapore, the team led by OCBC CFO and acknowledged bank capital 'guru' Chris Matten will move to Hong Kong on Thursday before splitting in two the following week. Roadshows open in San Francisco and London on Monday June 25, moving to Chicago and Frankfurt on the Tuesday, Boston and Amsterdam/Benelux on Wednesday, New York on Thursday and London on Friday, when the deal is likely to price.

The incorporation of euro and sterling tranches represents another first for an Asian bank capital deal and is expected to generate significant excess demand from a region where bank capital transactions have been rife during the past year, raising over $50 billion. In particular, there are said to be a sizeable number of UK-based investors who do not buy euro or dollar denominated paper, but remain very keen on bank capital as an asset class.

For most observers, however, the key question is why OCBC is proceeding with a transaction now and in the face of what will almost certainly be competing offers for KCH from other Singaporean banks. One answer lies in the fact that there is currently a very strong bid for international debt issues from Asia and bank capital paper in particular. For OCBC, this unquestionably strong demand makes borrowing all the more appealing when it is also combined with an extremely low interest rate environment.

In previous research, UBSW has speculated that there will a further 25bp rate cut at the FOMC's meeting later this month but believes this may represent the bottom of the cycle. Come September, when OCBC could next feasibly issue if it misses the July window, this favourable environment may no longer exist. Others have also been quick to point out that come September, rival banks no longer bound by their advisory roles could also muscle back into the frame.

A second major concern surrounds use of proceeds should OCBC fail to win KCH. The bank already has one of the highest capital adequacy ratios in the whole of Asia and further capital would considerably drag down its return on equity, which stood at 10.66% as of end 2000.

However, observers say that the forthcoming deal incorporates 'make whole' provisions, meaning that should the acquisition fall through, OCBC can call the transaction within 30 days of pricing and compensate investors with an as yet undisclosed sum. Should the bond issue price as expected at the end of June, the call would then expire at the end of July, when under the current timetable, KCH shareholders will have made their decision.

As of end 2000, the OCBC group had a total CAR of 22.7%, of which tier 1 comprised 17.5%. Standard & Poor's has estimated that an acquisition of KCH will halve OCBC's current ratios. "The acquisition implies goodwill of about S$2 billion, which if deducted from OCBC Bank's equity base of S$8.15 billion at Dec 31, 2000, reduces shareholders equity by one-quarter," it states.

But few doubt the likely success of a deal, which if nothing else offers an element of diversification from DBS. "Some investors have been reporting a little bit of name fatigue with DBS," one banker reports. "Buying OCBC should offer a good hedge against its rival's many transactions."

Indeed for many observers, the key determinant of success will be how closely OCBC can price to DBS. The latter's three outstanding sub-debt transactions are all trading within close range of each other.

Its $850 million 7.125% May 2001 deal closed yesterday (Thursday) in Asia at 180bp/170bp, while its $500 million 7.875% April 2010 was quoted at 176bp/166bp and its $750 million 7.875% August 2009 issue at 173bp/163bp.

One hurdle may be OCBC's rating, one notch below DBS. Presently, the bank has an Aa3 senior debt rating from Moody's, against Aa2 for DBS and an A rating from Standard & Poor's (implied) against A+ for DBS.

But recent tier 1 retail-driven transactions for Standard Chartered and DBS show that far from waning, the region's enthusiasm for sub-debt continues to grow. Standard Chartered, for example, priced a $1 billion perpetual non-call five transaction last Wednesday on the back of what is said to have been a huge book in Asia. Led by Goldman Sachs and JPMorgan, the deal was increased from $500 million and pricing tightened from 9.25% to 8.9%.

"Retail investors are looking for yield and are largely insensitive to either rating or subordination," says one banker. "If you combine these with a credit that has high name recognition, then you're on to a winner."

Citic Ka Wah

Roadshows for a $200 million to $250 million lower tier 2 issue for the Baa2-rated bank also begin next week, opening in Hong Kong on Thursday. Incorporating a step-up structure and a 10-year final maturity, the deal will be led by joint bookrunners Barclays and UBS Warburg, with ICBC as joint lead.

Presentations will move to Singapore on Friday, then New York the following Monday, London on Tuesday and Frankfurt on Wednesday, for pricing by the end of the week.

The leads will be similarly hoping that the transaction appeals to the private banking sector, despite the bank's small size and lack of name recognition. Comparables are provided by three sub debt transactions launched by Hong Kong-based banks this year.

Baa1-rated Dao Heng bank has a 7.75% January 2007 issue trading at 183bp/165bp, while Baa2-rated Bank of East Asia has a 7.5% February 2011 issue at 221bp/207bp. But the nearest comparable is likely to be a 7.5% March 2011 transaction for Baa2-rated Dah Sing Bank, currently trading at 248bp/238bp.

As of December 2000, analysts say that Citic Ka Wah (CKW) had a capital adequacy ratio of 17.12%, down from 19.16% in 1999. Debt stood at HK$50.944 billion, while NPL's amounted to 5.18%.

Proceeds are likely to be used as a capital cushion for the bank's rumoured bid for HKCB, owned by the China Resources group. It was reported earlier this week that the red chip had received four bids for the bank, one of which came from CKW.

Bank of China

Bank capital experts have also begun to speculate that the Bank of China is preparing a $1 billion to $1.5 billion subordinated debt issue for launch before the end of the third quarter. The deal is said to form part of the restructuring exercise that will see Bank of China Hong Kong and 11 sister banks incorporated in the SAR and listed on the Hong Kong Stock Exchange.

The two banks handling the IPO, Goldman Sachs and UBS Warburg, are also said to be bookrunners of the debt sale, although both have refused to comment.

The deal should bolster the new entity's asset base and cushion its disappointment at not being able to transfer a portion of its bad loan portfolio to a Ministry of Finance-owned AMC. According to fixed income analysts, Bank of China Hong Kong branch reported an NPL ratio of 11.64% at the end of 2000, down from 16.28% a year earlier. Return on equity was said to stand at a miserly 2.38% and return on assets 0.13%.

Analysts comment that the NPL figure is a little on the high side compared to other sister banks, with the better banks averaging ratios around the 9% to 10% mark. It is considerably lower than its parent, however, which reported an NPL ratio of 29% as of December and a capital adequacy ratio of 8.31%. 
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