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Canadian financial services company Manulife Financial became the first foreign insurance company to issue Tier 2 debt on Monday after it raised S$500 million ($364 million) from a 10-year non-call five-year transaction.
The deal starts the new week with a bang and follows last week's a string of bank capital issues from National Australia Bank, Societe Generale and United Overseas Bank. According to RHB Securities issuers have raised a total of S$10.2 billion so far this year from Basel III-compliant bank capital transactions.
Some investors had been urging restraint, worried that too much supply will hurt secondary prices. But the response to Manulife's deal appears to show there's still plenty of demand left, while recent issues are mainly trading above par.
Joint lead managers DBS and Standard Chartered, plus co-manager ANZ, went out with initial price guidance around the 4.15% area. This was then narrowed to 3.85% for the A- rated bond, which was priced at par to yield 197bp over the five-year Singapore dollar swap rate (SOR).
But despite the 30bp cut in guidance, few investors dropped out of the order book, which swelled to S$3.5bn at its peak, said one banker close to the deal. The bookrunners then discussed increasing the deal with Manulife, which settled on a slightly higher issue amount than it had initially envisaged.
The final order book closed at the S$3 billion level, the highest yet for a bank capital deal this year. This is possibly a function of the fact that the issue is a lot more investor friendly than other recent bank capital deals with no loss absorption or coupon deferral features.
A total of 107 accounts participated.
By geography 87% came from Singapore, with 13% from elsewhere. By investor type, fund managers and banks took 48%, while private banks and corporates were allocated a further 38% and insurers/agencies the remaining 145.
The rarity of insurance companies in the market meant figuring out fair value was something of a punt, one banker admitted.
One comparable is Singaporean NTUC Income Insurance, which sold a two-notch higher rated S$600m 15 non-call 10-year bond in August 2012.
That deal was trading around 3.1% on Monday afternoon, said one banker. But the illiquidity of the four-year old bond, and the difference in structure, meant it was a far from perfect comparable.
Last week's issues also provided a pricing point and a slight note of warning about pushing too hard on pricing since they are all hovering around par. NAB, for example, was trading slightly below par on a mid-yield of 99.88% on Monday, while Soc Gen was being quoted at 100.065% and UOB at 100.338%.
Nevertheless, bankers say overall demand remains strong; in part driven by the tepid yields available elsewhere. Also helping are attractive cross-currency swap rates, which allow foreign issuers to leave something on the table for investors while still beating their internal funding targets.
This confluence of supply and demand means bankers expect several more deals to be announced before the market loses steam. However, some investors are expressing concerns about sustained supply.
“Some investors are calling for a hiatus,” said one syndicate banker. “But the response today makes it hard to justify a break.”
Bankers are now preparing for more subordinated paper to hit the Singapore dollar market. There could be another deal later this week, and there are a few more rumoured to be coming soon, said a syndicate banker in Singapore.
The new sub debt deal means Manulife has hit the debt and equity markets concurrently. Last Thursday it priced an S$329 million real estate investment trust (Reit) flotation in Singapore at S$0.83 per unit. The deal, which offers a 7.1% dividend yield, is due to begin trading on May 20.
