OCBC raises another $500 million of lower tier-2 capital

The Singapore-based bank targets Asian investors with a bondholder-friendly issue of subordinated debt.

Oversea-Chinese Banking Corporation (OCBC) raised $500 million through the sale of subordinated notes yesterday, almost a year after a similar deal. The notes are intended to qualify as lower tier-2 capital for the Singapore-based bank.

The issue pays a fixed-rate semi-annual coupon of 3.75% and was reoffered to investors at 99.367 to yield 3.854% to an expected seven-year maturity. The bonds are subject to a one-off call at par on November 15, 2017; if the call is not exercised by the borrower, the coupon changes to floating-rate, paying 184.8bp over three-month Libor.

The expected early redemption means the notes were sold at a spread over the five-year US Treasury -- the closest benchmark note -- despite the ostensible final maturity date of November 15, 2022. The spread was set at 275bp (equivalent to 184.8bp over mid-swap levels), which was the same as the initial price guidance.

According to Standard and Poor’s, the notes are intended to qualify as lower tier-2 capital [in accordance with the relevant guidelines of the Monetary Authority of Singapore] and will be direct, unsecured, and subordinated to the claims of senior creditors (including depositors). They will, however, rank senior to OCBC Bank's share capital, tier-1 capital securities and upper tier-2 capital securities, and will rank pari passu with all other lower tier-2 capital subordinated debt issued by the bank.

But, “the bond does not have any regulatory call or regulatory switch options, so it is more bondholder friendly” than OCBC’s existing lower tier-2 notes with a final maturity of 2019 and an obligatory call in 2014, said William Mak, an analyst on Nomura’s bond sales and trading desk.

OCBC, Singapore’s third biggest lender by asset size, is aiming to improve the mix of its tier-1 and tier-2 capital in order to enhance the cost-efficiency of its capital structure.

The bank’s total capital is made up mainly of tier-1 capital; its tier-2 capital has fallen recently because of amortisations of other subordinated notes and due to deductions for investments in subsidiaries. Tier-1 and total capital adequacy ratios were 15.2% and 15.5%, respectively, as of September 30.

The total demand for the deal was only $850 million, made up of around 80 orders. The issue was sold under Regulation-S only, so onshore US investors were excluded. The joint bookrunners and lead managers were J.P. Morgan, Morgan Stanley, OCBC and Royal Bank of Scotland.

Asian investors took most of the notes (80%), and the remainder was placed with European accounts. By investor type, 45% of the issue was sold to fund managers, 34% to commercial banks, 13% to private banks and 8% was bought by assorted investors, including insurance companies and sovereign agencies.

The new notes were priced with little yield concession to where the seasoned notes were trading, but Mak added that they offered fair value – and after cheapening by 9bp in the secondary market yesterday due to weaker sentiment in general, they were attractive. And, he pointed out, “the bond also provides a decent pick-up over other similarly-rated European and Australian peers’ callable lower tier-2 issues”.

Moody’s rated the deal Aa2, but Standard and Poor’s assigned a rating of single A, three notches lower, and Fitch rated it A+. The net proceeds will be used for general corporate purposes. 

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