United Overseas Bank raised S$850 million ($670 million) of tier-1 capital last night, testing investor appetite for new-look perpetual securities that feature greater loss-absorption and can be written down at regulators’ discretion.
The leads attracted a good response during the day, allowing them to raise S$850 million and to print 10bp inside the initial 5% guidance, despite the unfamiliar structure. Indeed, demand is said to have reached S$2 billion from around 80 accounts.
The bonds, which are callable after five years (and every five years thereafter), were sold mostly to Singapore private bank accounts, which benefited from a 25bp rebate.
Overall, 74% went to private banks and other retail accounts, while 11% went to insurers, 11% to banks and 4% to agencies. Fully 93% was sold to Singapore investors.
Basel III requires that banks must have full discretion to cancel coupon payments on tier-1 perpetual securities and that investors must absorb losses while the bank is still a going concern. Step-up coupons after the first call are also banned.
All of these features are an attempt to shore up banks’ capital positions by making perpetuals less debt-like. In the past, such securities came with strong incentives for the issuer to redeem at the first call date and often limited the ability to cancel coupon payments, both of which had the effect of making them more debt-like and cheaper to issue.
Such features also make them less effective as a form of capital. Having convinced investors that perpetuals were basically a five-year fixed-income instrument, banks showed too little willingness even to defer coupon payments during the financial crisis. The European Commission had to forcibly restrain Royal Bank of Scotland from paying investors in 2009.
The Monetary Authority of Singapore has taken a broad view of the new standards, giving itself full discretion to force issuers to cancel coupons and write down principal before the bank fails, leaving only the more senior creditors at the table during insolvency.
Rating agencies are also reflecting this higher probability of loss in the new instruments. UOB has a stable AA- rating from all three credit rating agencies, while the notes are rated at Baa1 by Moody’s and BBB by Fitch.
Even so, the cost of UOB’s new capital was roughly 50bp wider than existing tier-1 deals from Singapore rivals OCBC and DBS, which are not Basel III compliant. The deal also pays a smaller coupon than UOB’s outstanding 5.05% preference shares, which are due to be called in September.
Lead bookrunners were ANZ, HSBC, Nomura, Standard Chartered, UBS and UOB.
As regulators around the region clarify their position on hybrid capital, issuance is expected to resume as banks aim to redeem 2008-vintage issuance.
