DBS returned to the international subordinated debt market for the first time since May 2001 yesterday (September 22) with the launch of a $750 million issue via Morgan Stanley. The upper tier 2 issue has a 15-year non call 10 structure and is expected to price New York time later today.
Local bankers add that OCBC is also preparing a S$500 million ($296 million) transaction, which should be launched within the next couple of weeks via Deutsche Bank and JPMorgan. Together the two issues will bring total subordinated debt issuance from Singapore to $7.7 billion over the five years since DBS opened the sector in August 1999.
Indicative pricing for DBS's sixth subordinated debt offering to date was set last night at 105bp to 110bp over Treasuries, or 65p to 70bp over Libor.
The most recent pricing point is a $1 billion 15-year non call 10 upper tier 2 transaction by UOB, which was launched in the middle of August via JPMorgan as global co-ordinator and Merrill Lynch as joint bookrunner. This 5.375% September 2014 deal was trading yesterday at 101.35% bid, to yield 5.20%. This equates to 116bp over Treasuries or 72bp over Libor.
Some bankers believe it provides a headache for DBS since it is trading much wider than the latter's existing curve, which spans three bullet bonds due 2009, 2010 and 2011.
For example, the bank's 7.875% August 2009 bond was trading yesterday at 117.01% bid to yield 3.99% or 72bp over Treasuries and 40bp over Libor. Its 7.125% May 2011 bond was trading at 115.44% to yield 4.41% or 38bp over Treasuries and 46bp over Libor.
UOB's July 2013 bond is also trading much tighter than its new deal and was quoted yesterday at 96.87% to yield 4.94% or 91bp over Treasuries and 57bp over Libor. This means the new UOB deal is trading 15bp wide of the old UOB deal on a Libor basis even though there is just a one-year maturity differential between the two. Bankers assume no pricing differential between a bullet bond and a call bond.
Relative to its own curve, a new DBS transaction looks like it should price in the very low 60bp range over Libor -assuming 3bp to 4bp per annum on the curve and a slight new issue premium.
However, some non-syndicate bankers believe this would be far too aggressive, arguing that any transaction priced more 5bp through UOB will collapse during secondary market trading. Others believe a 10bp differential between the two is achievable and believe a successful DBS transaction will pull the UOB 2014 bond in.
In the month since its launch, the UOB bond has widened very slightly, whereas the whole DBS curve has tightened, particularly on a Treasuries basis. For example, the UOB deal was priced at 114bp over Treasuries and 67bp over Libor. It is now 2bp wider on a Treasuries basis and 5bp wider on a Libor basis.
By contrast the DBS 2009 and 2010 issues have both tightened 20bp on Treasuries basis since the middle of August, while the 2011 has come in by 30bp. On a Libor basis, the first two have widened by a similar level to UOB, while the 2011 has outperformed the whole lot and tightened by 2bp.
Both DBS and UOB hold the same Aa2/A+ senior ratings from Moody's and Standard & Poor's and the same Aa3/A- upper tier 2 ratings. UOB, however, has a stronger bank financial strength rating of B+ compared to B- for DBS.
But for most market players DBS is viewed as the benchmark issuer for the sector. It had already established a full yield curve raising $3.475 billion from five deals before UOB even completed its first domestic bond in August 2001 and first international bond in June 2003.
Because of its partial government ownership, the bank also benefits from the halo effect of Singapore Inc.
The return of the Singaporean banks to the sub debt sector has been partially prompted by renewed M&A activity particularly in Thailand and Indonesia. UOB has been the most active so far this year, purchasing ABN AMRO's 80.77% stake in Thailand's Bank of Asia, a 23% stake in Indonesia's Bank Buana and has been shortlisted to buy a 51% stake in Indonesia's Bank Permata.
OCBC has purchased a 22.5% stake in Indonesia Bank NISP and acquired the remaining 51.1% stake in its insurance arm Great Eastern Holdings. DBS has been involved in a three way merger with DBS Thai Danu, Thai Military Bank and IFCT.
DBS has also returned to the subordinated debt sector because its existing bonds all have 10-year bullet maturities and begin losing their capital treatment after five-years.
At the end of the second quarter, DBS reported an overall CAR of 15.6% of which tier 1 comprised 11.6%. Net income also rose 395% to S$847 million over the same quarter the previous year. This was partly attributed to S$497 million in exceptional gains, although provisioning expenses were also lower.
