United Overseas Bank (UOB) sold a $800 million Basel III-compliant Tier 2 subordinated bond on Tuesday, pricing the transaction deep inside the curve of its existing old-style notes as institutional investor demand for the structure increases.
The bond – which has a tenor of 10.5 years and is callable in 5.5 years – is Singapore’s and Southeast Asia’s first ever dollar-denominated Basel III-compliant transaction, according to bankers on the deal. It is also the first dollar benchmark note from the Lion City this year.
UOB’s deal – the financial institution’s return to bank capital in two years – priced 25bp tighter than its initial price guidance of Treasuries plus 250bp, supported by strong institutional investor demand, according to a term sheet seen by FinanceAsia. The bond has a coupon of 3.75%
In fact, institutional investor demand for the bond was substantial, accounting for 91% of the transaction, while merely 9% went to private bankers. This is a momentous shift from ICBC Asia’s debut in the Basel III Tier 2 space last October, when only 55% of its notes went to institutional investors.
“It’s an extremely high-quality order book and certainly one that demonstrates the progress that Basel III transactions are making in the Asia space,” said a source close to the deal. “It’s also priced significantly inside any other Basel III transactions that have come to market in Asia.”
UOB’s note priced 100bp inside ICBC Asia’s – the Hong Kong subsidiary of the world’s largest bank by market capitalisation. In 2012, UOB issued a $500 million Basel II Tier 2 10-year bond callable in fifth year.
Investor appeal
A good gauge of how far investors have come towards accepting such structures is the pricing difference between UOB’s old-style Tier 2 notes, which printed at Treasuries plus 230bp, 5bp wider than its new ones. Also, not only was the size of the Singapore bank’s new notes much larger, the order book – more than $4 billion from 225 accounts – was also double that of its old-style bonds.
Asian investors snapped up 79% of UOB’s new-style notes, while the rest went to Europe, according to a term sheet.
Moreover, the execution process of UOB was shortened in order to reduce market risk amid a choppy market environment, according to sources. Unlike its Hong Kong bank counterparts that carried out roadshows prior to marketing their bank capital instruments, UOB only made investor phone calls on Monday.
In secondary markets, the notes tightened by 7bp to trade at Treasuries plus 218bp, according to Bloomberg data. The reoffer yield of 3.881% represents one of the lowest-yielding Basel III-compliant transactions globally, note sources.
Comparables
The closest comparables of UOB’s Basel III-compliant Tier 2 notes were OCBC’s old-style 2023s, which are callable in 2018. The bonds were trading at Treasuries plus 149bp, which translates into a G-spread of 190bp.
After adjusting for the credit curve (10bp) and an extra six-month extension (15bp), the fair value for OCBC’s old-style notes is around Treasuries plus 215bp, suggesting that UOB paid a premium of 10bp for the ‘non-viability loss absorption’ clause.
The non-viability loss absorption clause is where investors could lose all their money if regulators decide that the bank cannot service. This can happen in two ways. There can be a write-down of the notes’ principal or a conversion of that paper into equity.
“We generally like the Singapore bank legacy Tier 2s, so the Basel III premium as offered by this new UOB Tier 2s is reasonable when considering UOB’s strong credit quality and extremely low risk of hitting point of non-viability,” wrote Desmond Lee, credit analyst at Morgan Stanley in a report on Tuesday.
However, in the case of UOB, the investors’ risk is somewhat cushioned as the structure of the notes is different from that of other Basel III-compliant notes in Asia. If non-viability is declared, the write-down is sequential where the bank’s Tier 1 notes are written down before the Tier 2, say sources.
ANZ, Credit Suisse, HSBC and UOB were the joint lead managers and bookrunners of the deal.
More to come
Morgan Stanley believes that more Basel III issues are on their way to replenish $38 billion of legacy capital lost each year.
So far, Asian banks have issued about $8.4 billion of Basel III bank capital, of which $1 billion is in dollars. Although dollar bank capital redemptions are relatively low in the coming years – less than $5 billion annually – Asian banks are losing significant amounts of legal capital under Basel III’s grandfathering arrangement, notes the bank in the report.
Morgan Stanley estimates that Asian bank systems would be losing about 0.3% of their Tier 2 capital annually, and another 0.2% of Tier 1 capital for certain sectors – with higher reliance on hybrids such as Singapore, Malaysia and Japan – or equivalent to about $38 billion in total that needs to be replaced annually.
Elsewhere, Hyundai Capital Services raised a $500 million three-year floating rate note on Tuesday. The 114a and Reg S-registered bond was priced 20bp tighter than its initial price guidance of three-month US dollar Libor plus 100bp, according to a term sheet. BNP Paribas, Bank of America Merrill Lynch, Citi and HSBC were joint bookrunners of the transaction.
