UOB's arrival took some of the shine off DBS's inaugural dollar-denominated Additional Tier 1 (AT1) deal.
This opened for trading on Wednesday up almost one point, before hitting a wall of selling, which took it back down to a quarter point increase by the end of Asia's trading day.
Nevertheless, UOB was able to build a peak order book of $5 billion for its new Tier 2 deal and bankers reported only marginal drop off to $4.4 billion after price guidance was revised from 200bp over Treasuries to a final range of 170bp to 175bp over.
This level of demand was not quite in the same league as DBS, which built up a peak order book of $8 billion and final order book around the $6.5 billion mark on Tuesday. But that is hardly surprising given UOB has already issued one Tier 2 deal this year and DBS's offering ranks as Asia's only investment-grade-rated AT1 transaction.
Syndicate bankers also noted that the distribution statistics for UOB's new deal showed how much market conditions have changed since March when it last came to market.
Back then, a $500 million 10.5- non call 5.5-year deal achieved a final order book of $1.1 billion, with placement to 100 accounts, of which 90% came from Asia and the vast majority of those from Singapore.
This time round, bankers said there were 275 accounts in the final order book, with a placement split of 70% Asia and 30% Europe. They added that the Asian component had a pretty even split between Singapore and North Asia.
By investor type, fund managers took 64% (up from 54% in March), while 17% went to insurers and agencies and the remaining 19% to banks and private banks.
Final pricing of a $600 million 10.5- non-call 5.5-year was fixed at par on a coupon and yield of 2.88% or 170bp over Treasuries.
There is a one-time call option in March 2022 and a reset at the prevailing five-year mid-swap rate plus the initial spread (so not quite as good as its deal earlier in the year).
This 3.5% September 2026 issue (callable in September 2021) was trading on a G-spread of 168bp on Tuesday. It means the new deal has effectively priced through its predecessor after taking a six-month curve into account.
Bankers said this reflected the severe shortage of bonds from the earlier deal in the secondary market.
"This is another case of the primary market repricing the secondary," said one syndicate banker who estimated fair value around the 160bp level. Part of this calculation was based on where a new senior UOB deal would come.
"We estimated pricing of a new senior deal around the 70bp mark and you'd normally factor an 80bp to 90bp premium on top of that for Tier 2 debt," the banker added.
Non-syndicate credit analysts placed fair value in the 165bp to 180bp range.
At 170bp over Treasuries, UOB has also priced 63bp inside of DBS's AT1 deal, which was trading on a G-spread of 233bp on Wednesday. This is much tighter than the differential between Chinese Tier 1 and Tier 2 paper.
For example, China Construction Bank has a 3.75% 2025 Tier 2 bond outstanding, which was yielding 2.79% on Wednesday. It also has a 2049 AT1 bond, which was yielding 3.71%.
This equates to a 92bp differential between the two.
But the banker argued, "The lower the rating the wider the differential investors expect between Tier 1 and Tier 2 bonds. We think this is the right level for UOB as CCB has a BBB+ Tier 2 rating, while UOB has an A2/A+ rating."
Chinese bank capital paper has outperformed Singaporean paper so far this year, thanks to the former's strong onshore bid and the latter's well-publicised problems with the local oil and gas sector. As a result, CCB's 3.875% 2025 Tier 2 deal has risen five points in price terms since the beginning of March, while UOB's 3.5% 2026 deal is up by just under three price points.
One factor, which may stand in UOB's favour, is its lower exposure to the O&G sector compared to DBS and OCBC. Analysts estimate this amounts to roughly 4% of all loans compared to 7% at DBS.
So far this year, non-performing loans have risen marginally to 1.44% from 1.4% at the end of 2015.