DBS Holdings completed the tightest additional Tier 1 (AT1) capital deal on record on Tuesday with a $750 million transaction that also marks its first dollar-denominated transaction in the sector.
However, the record breaking pricing failed to deter investors, with the order book peaking at $8 billion before settling back down to $6.5 billion after price guidance was revised.
The combination of the continuing low interest rate environment, Singapore's credit fundamentals and a scarcity of paper from the Lion City all contributed to the deal's success.
As one syndicate banker commented: "This was a very big draw for institutional investors who cannot get that kind of coupon and credit normally."
Indicative pricing for the perpetual non-call five deal was initially pitched at 4% before being tightened to 5bp either side of 3.65%. Final pricing was fixed at par on a coupon and yield of 3.6%, equating to 239bp over US dollar mid-swaps.
Syndicate bankers said Asian investors took about 80% of the A3/BBB rated deal, with the remaining 20% placed in Europe, the Middle East and with offshore US accounts. By investor type, fund managers accounted for roughly two-thirds, with private banks allocated about 20% and insurers and corporates the rest.
Syndicate bankers said fair value was difficult to pinpoint given the lack of direct comparables, but suggested a level anywhere from the mid to high 3% level.
DBS has an existing A3/BBB rated Singapore dollar denominated 4.7% perpetual AT1 deal. This has a call option in 2019 and was trading Tuesday on a mid-yield of 3.551% or 3.499% on a US-dollar-swaps basis.
Mizuho calculated fair value at 3.5% based on a 35bp differential between UOB's Singapore-dollar-denominated AT1 and Tier 2 deals, plus a 20bp to 30bp premium on top of this after accounting for the scarcity of Singapore dollar denominated paper.
The new deal breaks ICBC's record as the tightest priced AT1 deal on record. This Ba1 rated 4.25% perpetual issue (callable in July 2021) was trading on a mid-yield of 4.22% on Tuesday, or 305bp on a G-spread basis.
Singaporean bank capital regulations are more investor-friendly than Europe, which should also count in DBS's favour. Unlike in Europe, its AT1 deal counts as equity on its balance sheet and there are no specific write-downs if the bank's capital falls below certain triggers.
Full or partial write-down is at the discretion of the Monetary Authority of Singapore. Interest payments are also non cumulative, with no limit on the number of times DBS can opt to suspend coupon payments.
Of the three Singaporean banks, DBS has the second highest capital adequacy ratio, at 16.3% as of the end of June, and a Tier 1 ratio of 14.4%. OCBC has a Tier 1 ratio of 15.5% and UOB 13.2%.
However, Moody's placed Singaporean banking ratings on negative outlook in June, citing deteriorating asset quality largely because of problems relating to delinquent oil and gas loans.
This factor impinged on DBS's second quarter results, which showed a 5.95% slide in net profits to S$1.05 billion ($769 million) mainly thanks to a write-off relating to the bank's holdings in oil services firm Swiber.
However, Moody's concluded that: "Singapore banks will maintain strong capital buffers. These buffers will remain unaffected by higher credit costs, because pre-provision income will be sufficient to cover rising loan-loss provisions."
In a recent credit note, JP Morgan also suggested Singaporean bank capital debt was now cheap after underperforming Chinese equivalent paper all year. "Asset quality will continue to weaken but stressing oil and gas sector suggests these represent a manageable earnings risk," the bank argued.
Global co-ordinator for DBS's new AT1 deal was DBS, with Citi, Deutsche, HSBC and Soc Gen as joint bookrunners.
