UOB adopts rare structure for dollar AT1 debut

Demand for the non-call six-year note reached $3.25 billion at peak level, highlighting robust appetite for hybrid capital.

United Overseas Bank raised $650 million through the sale of its first dollar-denominated Basel III-compliant bond on Wednesday, joining a recent pick-up in issuance of the hybrid capital in Asia.

The Singapore lender turned heads with a perpetual non-call six-year format, rather than a habitual non-call five-year structure that most bank borrowers issue in the region. However, investors were largely unfazed by the uncommon call option after six years, building a respectable order book of $3.25 billion at peak level, before moderating to $2.6 billion in the end.

The hybrid deal was launched a day after its Chinese counterpart, Bank of Zhengzhou, raised $1.19 billion from its maiden dollar sale in a non-call five-year format.

Banks in Asia ex-Japan region issued more than $15 billion of the AT1 bonds this year, up from $9.4 billion raised for the entire last year, according to Dealogic. The surge in issuance volume was driven by Postal Savings Bank of China's mammoth $7.25 billion sale of the AT1 debt last month.

“It is a rare structure in the market but there is a lot of demand for bank capital and hybrid product across the region”, a Singapore-based fund manager told FinanceAsia. “Perpetual bonds used to be a product for private banking investors but more institutional investors have become major buyers of subordinated debt because the spread [has] compressed significantly,”

UOB, for example, priced the latest deal at 179.4bp over the mid-swap rate, which is much tighter than what DBS sold its dollar AT1 at last year, when the larger bank priced at 239bp over the mid-swap rate, according to a syndicate banker.

On Wednesday morning, UOB went out with initial price guidance at the 4.15% area, before tightening the deal to 2.5bp each side of 3.9% area. Final pricing was fixed at par to yield 3.875%, the bottom of the marketing range, a term sheet shows.

Before launch, some analysts pegged the fair value of the deal at 3.83% to $3.9%, by extending DBS's existing AT1 bond as a valuation benchmark. The DBS AT1, which is callable in 2021, was trading at a yield of 3.52%.

In the secondary market, the bond was about 5bp tighter than its reoffer price, even though it paid no new-issue concession.

In terms of distribution, Asia represented 72% of the entire deal, while Europe and offshore US accounts took 26% and 2%, respectively. By investor, fund managers took 66%, private banks 16%, insurance/pension funds 14% and banks 4%.

UOB sold its first-ever additional tier-1 bond in the Singapore dollar market in 2013, raising S$850 million ($673 million) from the trade.

Joint bookrunners of the US dollar AT1 were UOB, Credit Suisse, Deutsche Bank and HSBC.

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