Singapore's United Overseas Bank (UOB) yesterday closed a dual currency subordinated notes issue raising $1 billion and S$1 billion ($609 million). The bonds were priced at 114bps over treasuries for the US dollar tranche and 68bps over the swap offered rate (SOR) for the Singapore dollar tranche. JPMorgan was global coordinator on the deal. It was joint book runner with Merrill Lynch on the US dollar tranche and joint book runner with Citigroup and UOB on the Singapore dollar tranche.
The bonds will count as upper tier two capital and are due in 2019, with a step up in year 10.
UOB and JPMorgan pioneered this structure back in 2001 and 2003 for the sub debt deals done in those years. This structure allows UOB to meet the MAS criteria that only 10-year paper can count towards regulatory tier two capital. In most other markets, five-year paper can count and so most bank capital deals tend to be structured as 10 non-call five deals.
In this case, however, only 10-year paper can count but given that capital starts amortizing away after year five, a bullet repayment can be quite costly for the bank. Thus, a 15-year deal with a call at year 10 and a step up option makes sense as it extends the life of the capital to the full 10 years but also makes it clear that UOB will be calling at year 10. So even though it is a 15-year deal, it can be priced as if it were a 10-year issue.
If the bank decides not to call the bonds in year 10, the spreads step up. In the case of the dollar tranche, the bonds become floating rates with a spread of 166.6bps over Libor. As the interpolated spread of the bonds at launch was 66bps over Libor for the 10-year paper, investors are being offered a roughly 110-120bp kicker if the step up occurs. Thus UOB is incentivized to call the bonds at year 10.
For the Singapore dollar tranche, the bonds stay fixed rate but move to a spread of 168bps over the Singapore swap offer rate, 100bps higher than the 10-year spread.
The timing of the issue caused some eyebrows to be raised, coming as it did bang in the middle of the summer holiday season. In the end, though, this proved not to be an issue. Demand for the dollar tranche was said to be five times the initial target of $500 million with the final allocation being split 42% to the US, 37% to Asia and 21% to Europe. There were over 120 names in the dollar book. On the Singapore dollar tranche 98% went to Singapore and 2% elsewhere.
In terms of the types of investors who bought the deal; 44% went to investment managers, 28% to private banks, 23% to insurance companies and 5% to others.
"It's pretty amazing to get this level of demand given that everyone in the market is in the Hamptons or Pattaya or wherever it is they go," said one debt market professional commenting on the deal. "The investors have done well and the issuer has not had to leave any money on the table."
Indeed, this is the first accelerated book built benchmark deal to come out of the region this year. Books were opened on Monday morning with initial guidance of T+117bps for the dollar tranche and SOR+70bps for the Singapore dollar tranche for a size of $500 million and S$500 million respectively. To have priced below that range while doubling the size of the deal is a real achievement.
But it was certainly a risky strategy given the quietness of the markets. The underlying treasury markets have been strong since the weaker than expected jobs numbers two weeks ago, but it was certainly brave to assume that this would translate into this kind of demand for a dual currency Asian bank deal.
Still, the deal allows UOB to miss the expected logjam looming in the Asian debt capital markets. It also allows UOB to boost its capital ratios. Before the deal, the bank had a tier one ratio of 12.8%, a tier two ratio of 3.8% and a combined capital adequacy ratio (CAR) of 13.6%, based on its first half 2004 numbers. After the deal its tier two ratio will move to 8.6% with its total CAR moving up to 17.1%.
This is clearly in excess of the MAS's stated aim for banks to get their CAR down to 12%. Thus the deal looks as if UOB is aiming to balance the levels of tier one and tier two debt on its balance sheet. It also provides the bank with a war chest as it enacts its 'premier regional banking strategy'. In recent weeks it has stated that it is interested in bidding for Bank Permata in Indonesia and the proceeds from this deal will certainly give it a lot of ammunition going into the expected bidding war for this prize asset.