OCBC is preparing to launch roadshows for the first issue off its innovative preference share programme next week. With JPMorgan as lead manager, the deal will have a perpetual structure with call options after years five and ten, plus every coupon thereafter.
This mirrors a structure pioneered by a number of European banks last summer and because there are no step-up provisions, the deal will be classified as core capital rather than as a hybrid, which have would limited issuance to 15% of OCBC's CAR. At the end of 2002, OCBC announced its intention to up set a programme with five different classes of preference shares of up to S$1.25 billion ($717 million) each and one class of preference shares worth up to $1.25 billion. However, it seems likely that OCBC submitted a sizeable filing to give itself maximum flexibility and will not raise the entire amount. Its desire to issue preference shares is said to stem from the cost of capital savings preference shares can offer over straight equity.
At the end of the first half of 2002, OCBC had an overall capital adequacy ratio of 19.9% of which tier 1 accounted for 11.1%. Given that its tier 1 ratio is already well over the MAS (Monetary Authority of Singapore) minimum of 8%, analysts have speculated that the bank must be looking to replace its plain vanilla equity with preference shares rather than enhance its overall ratios.
This has led many to believe that the bank is either preparing to make a substantial acquisition, or a large dividend pay-out following the disposal of non core assets. It has already been reported that OCBC has made a bid for a major stake in Hong Kong's Bank of Asia, although to date, the bank has denied this is the case.
Where non-core assets are concerned, the bank has until July 2004 to complete its programme. Some analysts believe each series of disposals will see it pay capital gains back to shareholders in the form of enhanced dividends. Its ability to do so has recently been boosted by changes to Singaporean tax laws, which formerly prevented one-off capital gains being returned to shareholders via dividends unless an institution had earned enough tax credits in its section 44 account. If it did not have enough tax credits, it was then required to pay advance tax to make up the balance.
Under recent changes, Singapore has changed from a dividend imputation system to a one-tier system. Previously, tax on corporate profits, whether retained or paid as a dividend, was deducted at source (ie at the company level). Shareholders then received a tax credit for their dividend payments, which could be offset against personal tax liabilities. From now on, however, dividends will be tax exempt. But, companies will only be able to start issuing tax-exempt dividends once they have drained their section 44 tax credit accounts and to allow corporate Singapore time to do so, the government has instituted a five-year transitional period. The new tax laws provide an additional pricing complication for OCBC's issue and it is likely to require the kind of extensive investor education that will result in a longer than normal marketing period.
The main pricing benchmark should be the outstanding local currency and dollar denominated preference share issues of DBS Bank. The bank raised $725 million and S$100 million in perpetual non-call 10 securities in March 2001. The Singapore dollar tranche was priced at par with a coupon of 5.35% stepping up to 252bp over Sibor if the deal is not called in year ten. At this level, it came at parity to the dollar offering, which was also priced at par with a coupon of 7.657% to yield 280bp over Treasuries, stepping up to 320bp over Libor if not called in year ten.
Yesterday, the dollar deal was quoted at 110.39% to yield 6.05% or 200bp over Treasuries. Goldman Sachs and Morgan Stanley jointly led the issue, which attracted huge demand from private banks. With interest rates and stock markets having continued to fall in the interim period, the OCBC issue should similarly attract strong private banking interest.
The lack of issuance from Singapore over the past year, combined with the small size of the transaction should also provide a good pricing lever, though this will be balanced in part by the overhang of future issuance. In the subordinated debt market, OCBC typically trades about 30bp wide of DBS. The bank's 7.75% September 2011 upper tier 2 transaction is currently bid at 114.37% to yield 5.63% or 160bp over Treasuries.