OCBC Bank announced plans to issue up to S$500 million ($305 million) of guaranteed preference shares yesterday (January 13), in a move aimed a further strengthening its already robust capital base. The issue will qualify as tier 1 capital for the bank and be subordinate to deposits and other debts but above the bank's straight equity.
Like most preference shares, the new issue's dividends can be restricted in certain circumstances, mainly if the bank's capital ratios go below a certain level. However, with a total capital adequacy ratio of 17.6% and a tier 1 ratio of 12.5%, such an event looks a long way off. According to Fitch ratings - which yesterday assigned a rating of A to the shares, one notch below OCBC Bank's senior rating of A+ - OCBC has not missed a dividend payment since World War II.
The shares will be issued by a Cayman Islands SPV called OCBC Capital Corporation, which in turn is guaranteed by the parent. The shares will be ranked alongside all the bank's other preference shares and other hybrid tier 1 stock.
The issuing SPV has the option to redeem the preference shares at the first dividend date ten yeas after they are issued and every dividend date after that. They can also then be substituted with preference shares issued by the parent bank itself, under certain circumstances.
Still, the move is the latest in a string of capital structuring exercises that OCBC has undertaken in recent years. In May last year the bank announced that it was setting up a $2 billion Euro commercial paper programme, which was completed in August. Then in June, the bank sold a rare senior debt deal, when it completed the sale of a three-year FRN.
The latest deal further shows the determination of OCBC to run an efficient funding strategy as it seeks to expand around the region under its CEO David Conner. Last year it acquired substantial control of its listed insurance subsidiary Great Eastern Holdings. It has also bought a stake in Bank NISP of Indonesia and it is understood to be looking at possible acquisitions in China.
Conner says, "Although we don't need additional capital at this time, we're taking advantage of the current favourable market conditions to issue preference shares in order to further strengthen our capital base, and move towards a more efficient capital structure which will allow us to lower our overall cost of Tier 1 capital."
Indeed in recent months OCBC's share price has performed strongly. Since hitting a one-year low in March last year of S$11.60, the bank's shares are now trading up nearly 19% at S$13.8, close to its recent high of S$14.2.
OCBC Bank is the lead manager and sole book runner of the preference share issue, with Deutsche bank and JPMorgan acting as co-managers.
