Singapore’s debt capital markets have once again proved a fruitful source of capital funding for banks after local lender United Overseas Bank (UOB) and French bank Societe Generale executed successful deals on Wednesday.
The City State’s army of private banking investors have long provided a strong underpinning for bank capital deals, which offer them the combined attraction of a decent yield and an investment grade rating.
UOB returned to its home market for Basel III funding for the first time since May 2014 with an S$750 million ($547.2 million) alternative Tier 1 transaction (AT1) that replenishes an S$1 billion Basel II bond that matured in April.
Soc Gen, meanwhile, continues the trend of European banks accessing the Singapore dollar-denominated bond market following ABN AMRO’s successful S$450 million deal in March.
The Singaporean bank’s deal was structured as a perpetual non-call five offering, with initial price guidance pitched at the 4.25% level. That was enough for the joint bookrunners — Credit Suisse, HSBC, Standard Chartered and UOB itself— to generate strong demand that stood at S$2.4bn by late afternoon.
Final pricing was fixed at par on a coupon of 4% to yield 203.5bp over the Singapore swap offer rate (SOR).
The deal is callable in 2021 and has an A3/BBB rating: five notches lower than its senior debt. Had it been rated by S&P it would have fallen into the high-yield category given the agency downgraded its last AT1 deal to BB+ in September 2014.
Nevertheless, brokers felt the new transaction offered a fairly generous pick-up over UOB’s own existing debt and OCBC's most recent AT1 deal.
OCBC issued an S$500 million 3.8% perpetual transaction last August. This was trading on a mid yield-to-call around the 3.5% level on Wednesday.
UOB’s own existing S$500 million 4.75% perpetual from November 2013 was trading on a mid yield-to-call around the 3.4% level.
The French bank’s S$425 million deal comprised a 10-year, non-call five-year Tier 2 issue, which carried a Baa3/BBB/A- rating.
DBS Bank, OCBC and Societe Generale were bookrunners and first approached investors with pricing around the 4.5% area. After building a final order book of S$1.4 billion order book this was pushed down to 4.3%.
Final pricing was fixed at par to yield 233.5bp over SOR.
A total of 95 accounts participated with 85% from Singapore, 9% Hong Kong and 6% other.
Investors were led by funds on 50%, private banks 44%, insurers and sovereign wealth funds 4% and other 2%.
Non-syndicate banks banker estimated Soc Gen saved 20bp relative to where it could raise Tier 2 debt in euros.
Open for business
UOB and Societe Generale have taken advantage of a yield-starved investor base that is still nursing its wounds. The collapse of Chinese equities last year left a lot of high net worth investors reeling, bankers said.
But these investors are not yet ready to return to the high yield bond market in force. That makes bank capital deals the perfect fit.
“These issuers play into the sweet spot for private banks now,” said one senior DCM banker in Singapore. “There are three ways for them to get yield: move down the credit curve, move out in tenor, or accept structural subordination. The least preferred way for them to get yield at the moment is going down the credit curve.”
Private banks tend to be more of a dominant force in perpetual deals. Bankers consequently said they expected more private bank involvement in UOB’s deal than Soc Gen’s.
Yet the backstop demand private banks offer is still important for Tier 2 deals. And much of their hunger for yield is also reflected among the institutional investor base.
But it is not just a captive investor base, which may tempt foreign banks to issue in the Singapore dollar market.
Bankers argued they should also be encouraged by cross-currency swap rates. Tightening swap spreads are offering razor-sharp funding levels for foreign banks compared to the dollar bond market.
They also noted that local investors with full credit lines to Singaporean credits are keen on diversification. Bankers are consequently expecting a growing pipeline of European bank issuers.
“There are other issuers looking at subordinated deals in the Singapore dollar market,” commented Samuel Chan, a syndicate banker at Standard Chartered. “Whilst they’re not all ready yet in terms of documentation, there will be several more coming to the market.”
Analysts concluded that Singapore’s other two major banks, DBS and OCBC are unlikely to follow UOB’s lead given they are both well capitalised. Their most recent results revealed common Tier 1 ratios of respectively 13.2% and 12.4%.
They also tapped the market reasonably recently. DBS sold an S$250m Tier 2 deal at the start of the year, while OCBC raised S$500m via its AT1 deal last August.
Nevertheless, some bankers think cheap funding levels may yet convince them to top up their capital levels with opportunistic deals.
This article has been updated with final deal stats.