Initially roadshowing in June, the deal was withdrawn shortly thereafter because of the markets volatility and an overall ambivalence on the part of investors toward emerging market credits.
Keeping an eye on the market, Barclays brought the deal back to the market after an easing in trading conditions. When the deal re-emerged the lead announced a guidance of 120bp to 130bp over mid-swaps, with pricing expected for Friday (August 12).
However, the deal was pushed back to Monday because of problems arising from the suspected terrorist plot to blow up trans-Atlantic airlines in London. The cityÆs transport system ground to a halt on Friday leaving commuters stranded and unable to get into their offices.
The notes carry a 30-year non-call 10-year structure and priced at par with a coupon of 6.84%; a spread of 185.1bp over treasuries or 130bp over swaps. At these levels, the deal comes at the wider end of guidance. If the notes are not called in August 2016, the notes step up by 100bp.
The final book closed north of $300 million, with almost 40 investors taking part. Geographically, the notes were sold 39% into Singapore, 30% into the UK and 14% into Hong Kong. The remaining 27% went into books from Asia, Europe and offshore US.
The new deal is the third dollar denominated hybrid tier-1 bond to be sold out of Malaysia over the previous 10 months.
In October of 2005, Southern Bank became the first Malaysian bank to issue hybrid tier-1 debt when it sold a $200 million perpetual non-call 10 deal. That was followed by Ambank, which priced a similar deal; a $200 million perpetual non-call 10-year deal in late January.
In terms of comparables, Public Bank has an existing 2014 lower tier-2 and a 2017 lower tier-2 deal. The 2014s were quoted at 93bp over treasuries or 50bp over swaps, while the 2017s were trading at 129bp over treasuries or 71 over swaps. That would imply a theoretical 2016 lower tier-2 deal at around 64bp over swaps.
Southern Bank meanwhile also has a 2014 lower tier-2 deal that is currently trading at 67bp over asset swaps and a 2014 tier-1 deal is trading at 132bp over asset. On a new issue basis, Public bank comes well inside of Southern Bank and has a much flatter lower tier-2 / tier-1 curve.
When AmbankÆs deal priced it came at par on a coupon of 6.770% to yield at 190bp over Libor. That deal is now trading at 248bp over treasuries or 185bp over swaps. Meaning that Public BankÆs new deal comes 55bp through AmbankÆs secondary levels.
Additionally, the deal prices very competitively when compared with other hybrid tier-1 offerings from other markets.
Shinhan BankÆs 2035 5.663% tier-1, which is rated Baa2/BBB and is callable in March 2015, is trading at 191bp over treasuries or 129bp over Libor. On a like for like basis, there is now a Malaysian bank trading through a Korean equivalent.
The fact that the deal, despite being delayed for several months, managed to price in such a turbulent market is a testament to the deal's groundbreaking structure. Notwithstanding, the success of the PhilippinesÆ sovereign deal that was hoped to reopen the issuance window, AsiaÆs debt market has struggled in recent weeks. AugustÆs holiday slump, coupled with the events in London and the Middle East have left emerging market investors somewhat unenthusiastic. Consequently, last week saw the marketÆs latest casualty when Korean quasi-sovereign Small Business Corp pulled its deal on Friday.
The Public Bank deal offers an innovative new structure to the hybrid tier-1 space in Asia, in that the deal is structured more towards its debt aspects than other tier-1 deals, which primarily focus on equity characteristics. In effect the deal more resembles a tier-2 deal, but still ranks one notch lower on the subordination ladder.
Both the Southern Bank and Ambank deals use similar structures to each other; a more traditional hybrid tier-1 structure that is familiar in the Asian market, issued through an offshore Labuan-based special purpose vehicle (SPV). This new deal, however, is issued directly from Public Bank and doesnÆt utilise any SPV.
The second and arguably the most important structural difference with the new deal is that it has a 30-year principle stock settlement.
What that means is that although the deal is callable after 10-years, and is callable each coupon date thereafter, if the bonds are still outstanding after 30-years, the issuer is then obliged to redeem the securities through cash that must be raised from the sale of equity.
ôThis structure effectively gives the investor a redemption date,ö says Richard Grainger, BarclaysÆ director of financial institutions DCM. ôThe significance however, is for the regulator, the equity replaces the debt on the balance sheet and the tier-1 capital stays the same, but creates a better form of permanent capital, which is one of the requirements of the guidelines.ö
The third distinct feature of the deal is that for investors the coupons are cumulative. The interest deferral language is similar to other structures. Basically in the event of a failure to pay equity dividends in the preceding 12-months the borrower has the option to cease coupon payments. However, when the equity dividends are resumed at a future date, unlike other structures on which the deferred interest is lost, this structure allows it to roll up. Again the deferred coupon can only be paid by cash raised from the issuance of shares.
The success and strength of this structure could provide a turning point for future Tier-1 deals. No doubt other banks and issuers in the bank capital market will take a long hard look at this new structure.
The proceeds will be used by the bank as permanent capital. As at the end of March, Public Bank, Malaysia's third largest lender by assets, had a group core capital adequacy ratio (CAR) of 10%, down from 10.2% at the end of 2005, and a bank core CAR of 9.6%, versus 9.8% over that same period.