OCBC raises $500 million in lower tier-2 capital from callable deal

Oversea-Chinese Banking Corporation (OCBC) took advantage of stronger credit markets on Tuesday, pricing a $500 million lower tier-2 subordinated bond issue late in the afternoon London-time. It was the first time since December 2007 that an Asian bank has included a call option after five years, and succeeded, despite investor anger earlier this year when Deutsche Bank and Korea's Woori Bank failed to exercise their early redemption options.

The issue pays a coupon of 4.25%, and was reoffered at 99.889 to yield 4.275%, which was165 basis points over mid-swaps or 199.7bp over the five-year US Treasury yield. The coupon on the notes will step up by 100bp -- to 299.7bp over the five-year Treasury -- if they are not called on November 18, 2014. The final maturity date would then be November 18, 2014.

The bonds are rated Aa2 by Moody's Investors Service, A by Standard and Poor's and A+ by Fitch; all agencies lowered their ratings a notch compared with OCBC's bank rating to reflect the subordinated nature of the bonds.

The bookrunners, Credit Suisse, Goldman Sachs, Morgan Stanley and OCBC, found a better reception to the pricing of the Reg-S deal among European and other non-Asian accounts than in Asia, which was reflected in the final distribution numbers. The book was two times covered, and 52% was allocated to European investors, 15% to offshore US accounts, 9% to the Middle East, and just 24% to Asia.

Bankers involved in the transaction argued that local Singapore bank comparables provided little pricing guidance due to their infrequent trading, so it made sense to look to recent international issues in the euro-denominated market for gauging relative value. They pointed to lower tier-2 transactions by a couple of Australian banks, ANZ and CBA, which were trading at around 150bp-160bp over mid-swaps. Both are 10-year bullet deals, but interpolating the curve, which is about 20bp tighter for five-years and then adding back 20bp to 30bp for a new issue premium, produced the 165bp spread that European investors in particular were happy with in order to gain exposure to the Singapore banking sector.

In late trading in Hong Kong yesterday, the OCBC bonds were quoted around the re-offer price.

However, not all analysts were convinced. Brayan Lai, the highly regarded credit analyst at Calyon, said that he "really wondered how the leads managed to squeeze the pricing". He guessed that European accounts might have been attracted by the scarcity value of tier-2 instruments, given changes to Basel II regulations and a focus on raising tier-1 capital.

Lai dissected the deal in several ways and also found that most of his clients believed the issue was priced too tightly. He pointed out that although upper tier-2 issues (which are more subordinated and can also defer coupons) by DBS and United Overseas Bank (UOB)  were trading on wider spreads, "one can argue that the lower tier-2/upper tier-2 distinction is increasingly blurred in financially healthy banks such as Singapore ones, such that the likelihood of non-payment in any case is close to nil". He also suggested that senior paper in the region, from the likes of Korean banks, pay much better spreads.

By investor type, fund managers and commercial banks each took just over 40% of the issue, while private banks bought 17%.

In a ratings notice released on November 10, Fitch Ratings said that, "the notes will be used for general corporate purposes while enabling a better capital mix between tier-1 and tier-2 capital; OCBC's tier-1 and total capital adequacy ratios (CARs) were both 15.2% as at September 30, 2009. Notably, even after factoring in the proposed acquisition of ING Asia Private Bank and its affiliated entities, OCBC's capital position is likely to remain solid with a high core tier-1 CAR of around 10%. This, together with an NPL (non-performing loan) reserve coverage of more than 100%, underpins OCBC's strong loss absorption capacity amid the still uncertain...economic outlook".

OCBC was set up in 1932 and is Singapore's third-biggest domestic bank by asset size. It has been expanding within Asia over the past few years, although Singapore and Malaysia still account for most of its total assets.