United Overseas Bank (UOB) priced a successful S$1 billion ($793 million) subordinated tier-2 capital bond issue on Monday. The deal was structured to comply with the transitional framework on bank capital outlined by the Basel Committee in January this year.
The 10-year bonds pay a 3.45% semi-annual coupon and were re-offered at par. They can be called by the Singapore lender at par on any interest payment date from April 1, 2016. There is a one-time coupon re-fix equivalent to the prevailing five-year Singapore dollar swap offer rate (SOR) plus 147.5bp if the bonds are not redeemed on that first call-date.
The notes are intended to qualify as lower tier-2 capital securities under the transitional Basel III rules, and to rank senior to all of UOB's common shares, as well as its tier-1 and upper tier-2 capital securities.
According to these transitional regulations, there can be no incentive for the issuer to call the bonds early, which would raise expectations that they will be redeemed before their final maturity date. Hence, there isn’t a coupon step-up after the fifth year.
Instruments issued after January 2013 will have to fully comply with the new Basel III criteria in order to qualify as bank capital. Holders of the instruments will be required to absorb any losses before other support, for example from tax payers, if the bank is in trouble. The UOB issue contains no loss-absorption language.
The regulation-S deal was issued out of the lender’s S$5 billion euro medium-term note (EMTN) programme, and is rated Aa2, single A and A+ by Moody’s, Standard and Poor’s and Fitch respectively.
There’s a shortage of comparable tier-2 bank capital bonds in the Singapore domestic market, so the pricing was more subjective than usual. One helpful benchmark was a 15-year, non-call-10 tier-2 transaction by insurer Great Eastern Holdings, which was issued with a 4.6% yield in January. The swap curve premium between five and 10 years is around 100bp, which would reduce the relative theoretical yield for Great Eastern to 3.6%, assuming the same effective maturity as the UOB issue.
That gave confidence to the joint bookrunners -- HSBC, Standard Chartered and UOB -- to approach investors with initial price guidance of 3.5%, and then a range of 3.45%-to-3.5%, before finally pricing the deal at the tight end of that range.
The deal attracted an order book of S$2 billion split over 70 investors which, in the context of the limited Singapore dollar market, was healthy. Almost all of the issue was placed in Singapore with just 6% sold to offshore accounts. Singaporean insurance companies and public sector entities, as well as international and domestic fund managers were large buyers, while private banks also provided a strong bid.
The bonds traded higher yesterday, and were bid at 100.375 as under-allocated investors topped up their holdings.
According to sources familiar with the transaction, the biggest attraction was the rarity of an issue by UOB itself, a lender that has “a loyal following” among domestic investors. DBS and OCBC both raised hybrid capital last year, but UOB had been biding its time.
The proceeds from the issue will be spent on a partial refinancing of an existing S$1.3 billion 4.9% subordinated issue that was launched in 2001. That issue is close to its first call-date in September this year and would, if not called, begin losing its regulatory capital value.