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Monday, 17 December 2018

Domestic Bond

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New standards for bank capital securities left many borrowers and investors befuddled in 2013, but there was no confusion over a landmark Tier 1 offering from Singapore’s United Overseas Bank.

UOB’s S$850m (US$674m) 4.9% perpetual bond, launched in mid-July, was Asia’s first public offering of Additional Tier 1 capital under the Basel III regime.

It introduced a new format to the region’s capital markets, paving the way for others. It proved Asian investors were comfortable with Basel III’s loss-absorption requirements for subordinated instruments and set a pricing benchmark for future issues.

Near the end of IFR’s review period, UOB returned with a second issue, while bigger Singapore rival DBS Bank was poised to complete its own Basel III debut.

The new rules require investors to be exposed to losses if issuing banks are declared non-viable. In UOB’s case, the Monetary Authority of Singapore insists that the notes convert to equity or are written down at the point of non-viability. Since the perpetual already counts as equity, UOB did not need to include any additional trigger for that conversion, based on its common equity ratio, allowing for a relatively simple structure.

The big question for UOB, as well as the offering’s investors and arrangers, however, was how to price that additional risk.

It managed to convince investors that the structure was similar to the old-style Tier 1 format, and ended up paying a premium of only 25bp–30bp over its outstanding old-style Tier 1 preference shares.

UOB’s Aa1/AA–/AA– ratings helped attract investors and the lender also included a rate-reset feature to ease investors’ fears over rising rates. At the first call date after five years, the coupon will convert into the prevailing six-year Singapore dollar swap offer rate plus the initial margin.

UOB and its five lead managers, ANZ, HSBC, Nomura and UBS and itself, correctly anticipated that institutional investors would expect a higher yield, placing 74% of the issue with private banks.

The final yield of 4.90% came inside initial price talk of 5.00%, after orders hit S$2bn. While that looked tight at the time, it had narrowed to 4.3% in early November, when UOB launched a second

Basel III-compliant AT1 bond. The second issue, with a longer first call date, priced to yield 4.75% and rallied the following day to 4.5%.

UOB proved Asian issuers did not need to pay plenty for new-style bank capital. In the process, it was able to transition into the Basel III standards and raise equity without diluting existing shareholders.

To see the digital version of this report, please click here.

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