It would be fair to say that UOB's deal, which will form part of the bank's $3.2 billion acquisition of Overseas Union Bank (OUB), went better than UOB or its fellow arrangers, JPMorgan and Merrill Lynch, could have anticipated.
Not only did it price at the low end at what was offered in the investor roadshows that have taken place since the end of last week, it generated enough interest to raise S$1.3 billion, almost double what the issuer had anticipated, making this the biggest local-currency denominated offering outside those done by the government.
At time of launch, the 15-year notes priced at par with a fixed coupon of 4.95%, the equivalent to 125 basis points over 10-year swaps, which was some way tighter than 5.05% ù the high end of initial price talk ù and more importantly, the 5% coupon that was set on the S$1 billion tranche of OCBC's sub-debt deal in July.
UOB achieved tight pricing because it can exercise a call option in 2011, so investors regard it as a 10-year bond although it is nominally a 15-year deal. It is expected that UOB will call it because starting year 11 the spread becomes 225 pb over 5-year swaps.
Additionally, the structure on the deal differs significantly from those used on the DBS and OCBC transactions, and is preferable to UOB from a regulatory perspective. Both DBS and OCBC issues used 10-year bullet structures, giving average lives of only 7.5 years because their bonds amortize after five years. The UOB deal, however, will be considered upper tier 2 capital for the first 10-years.
An extra bonus in terms of selling the transaction happened before pricing was finalized when the deal received a rating of Aa3 from Moody's, while the issuer was afforded a B+ financial strength rating. This made it the highest-ever rated bank sub-debt offering in non-Japan Asia.
Marc Jones, head of JPMorgan's debt capital markets team, was more than pleased with the investor response to the deal. "We are delighted, obviously, especially with how it was received given the huge supply of sub-debt that has already been issued," Jones says. "There was a general view that UOB would have to offer a premium of between 10 and 20 basis points but instead the issuer was able to dictate terms because of the quality of the deal and was able to break the psychological barrier of 5%."
Jones notes it became clear early on during the roadshows that there would be little problem selling the transaction and that the offering could be increased significantly. "On Friday we went out with price guidance of between 4.95% and 5.05% and by 8 pm we had orders of over S$400 million," he adds. "There was no shortage of interest when we resumed this week and by Tuesday afternoon there were orders for S$2 billion."
Philip Lee, head of investment banking at JPMorgan in Singapore, believes that UOB must take a lot of the credit for the deal's success, not only for going against the grain with the structure used, but also because it had confidence the deal could be sold through the bookbuilding method.
"Most Singapore dollar bonds are fully underwritten before launch but in this case the borrower had the foresight to take the risk on the bookbuilding process and was able to achieve the best result," Lee says. "Although it is S$2 billion short of what it needs for the OUB acquisition, the borrower did not want to sell out to investors."
In the end the deal was more than three times oversubscribed and placed with 72 investors. Insurance companies bought 45% of the bonds, banks accounted for 23%, fund managers 15%, 10% was placed with company accounts and 7% to individual investors.
Around 10% of the deal placed outside Singapore on books in Switzerland, Germany, Hong Kong and China.
It wasn't just the lead managers that were happy with the deal. The issuer also expressed satisfaction with the events of the past week. "We are extremely pleased with the market's enthusiastic response to our issue," states Wee Ee-cheong, deputy chairman and president of UOB. "Despite substantial recent supply of bank capital in the Singapore dollar market, investor demand for the UOB credit was extremely strong, allowing us to price a larger transaction than we initially anticipated at attractive levels."
In addition, and in a move that is highly unusual from lead managers of any debt deal, they were keen for people to know just how enthusiastic the investor response was. One fixed-income buyer prepared to give her assessment was Joanna Ong at Prudential.
"I think this deal is definitely more interesting than any of the previous sub-debt issues," Ong claims. "The 15-year notes have the step-up feature after 10 years and that was definitely more suitable for longer-term investors."
As far as pricing goes, Ong was a little disappointed that it wasnÆt offered at a slightly higher coupon, but still believes it offers good value. "Pricing was a little lower than we hoped and slightly disappointing in terms of absolute yield pick-up," she says. "Having said that, there is still value when you consider the credit quality and that it is a sub-debt deal from a top-tier institution. The issuer had its rating confirmed by Moody's as well so we are confident about how it will perform in the next 10 years."
Ong also felt the deal offered excellent value compared with Singapore government and corporate paper. "The deal has a tremendous pick-up of over 100 basis points on government bonds and as long as we're confident in the issuer we will not hesitate to buy the paper," she says. "As for corporate bonds, there really isn't that much long-dated paper of this quality so this kind of deal sort of acts as a missing piece in the local bond market."
