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Friday, 28 November 2014

NBAD turns to Malaysia for LT2

BONDS: Gulf bank eyes first subordinated bond in Malaysian ringgit ahead of Basel III deadline

NBAD turns to Malaysia for LT2

National Bank of Abu Dhabi is looking to take advantage of Asian appetite for yield with a rare subordinated sukuk in the Malaysian ringgit market. This comes with less than two months to go before Basel III standards render traditional Lower Tier 2 bonds obsolete.

The United Arab Emirates bank has been working on a potential ringgit-denominated sub bond for the last few weeks. If it comes to market, it will be the first Tier 2 sukuk from a foreign issuer in Malaysia.

Much of the plan is believed to be in place with the information memorandum prepared, and amendments made to an existing M$3bn (US$979m) conventional/Islamic MTN programme to incorporate the issuance of subordinated notes.

All that was needed was to pull the trigger, but pricing levels were proving to be a hurdle for NBAD, thought to have a target yield level in mind that was well below investors’ expectations.

“Pricing of LT2 issues has gone up,” said one rival banker. “Investors are pushing back for more yield, especially since they see banks rushing to print the old structures before January. That is why you see local banks having to pay more for their LT2 outings in recent weeks.”

Local agency Ram has rated NBAD’s sub bonds AA1, similar to what OCBC Malaysia, a Singapore-based bank with a long history in Malaysia, obtained for its LT2 debt. OCBC Malaysia sold a 10-year non-call five at 4.00% earlier this year and the notes were still at around par last week.

CIMB Bank sold a M$1.5bn LT2 last week at 4.15%, higher than the 4% its Islamic unit paid for a similar structure in September.

NBAD will also need to pay a premium over Malaysia’s local banks to place its paper, serving as a litmus test of investor appetite for foreign subordinated bonds.

Although NBAD is an established credit, having sold two senior issues, the subordinated nature of the new bonds will give investors another reason to demand a higher premium.

On top of it all, the basis swap has risen more than 15bp in the past month, making the ringgit funding less attractive when swapped into US dollars.

The lack of foreign sub deals in Malaysia stands in stark contrast to neighbouring Singapore, where a number of foreign banks – the latest being ABN AMRO – have sold LT2 bonds in the last two years.

“I don’t see many foreign banks able to tap conventional sub debt like NBAD going forward,” said one Malaysian debt-origination banker. “NBAD is unique and it can do it, if it can accept the pricing realities.”

Market talk is that HSBC and Maybank may be the lead managers, as they were for NBAD’s M$500m five-year sukuk sold two years ago. That Islamic bond was the first in Malaysia from a Middle Eastern commercial bank.

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