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DBS offers to trade new notes for $800m in preference shares

The replacement shares come with higher payout, shorter tenor

[SINGAPORE] DBS Group Holdings is offering to buy back $800 million of an outstanding $1.7 billion preference share issue, offering in exchange new notes with a higher payout and a shorter tenor.

Existing note holders can, via a tender, exchange at par for the new notes which will pay out 4.7-4.9 per cent, and has a call date in November 2019, the bank said yesterday.

The callable date for the existing preference shares is 2020. The non-cumulative non-convertible non-voting class N preference shares have a payout of 4.7 per cent.

The reason for the bank's action is that the new shares will be Basel III compliant and qualify as Tier 1 capital.

DBS said that "the fact that the existing preference shares no longer fully qualify as Tier I capital of DBS Bank constitutes a preference share change of qualification event" under the Basel III capital adequacy requirements implemented by the Monetary Authority of Singapore (MAS) on Jan 1, 2013.

In a statement yesterday, DBS said that it was "proposing to accept tenders amounting to $800,000,000 in liquidation preference of existing preference shares, or a lower or greater aggregate amount at (its) discretion".

Holders who wish to participate must do so by 5pm Singapore time on Nov 21, 2013.

The tender does not apply to the retail tranche issued also in 2010 - an $800 million 4.7 per cent non-cumulative non-convertible non-voting class O preference shares callable in November 2020.

"We are starting with the institutional tranche - to see market reaction," said a bank spokesman.

If the response is "overwhelming", a bigger issue of the new notes could be considered, said Clifford Lee, DBS Bank head of fixed income.

The 4.7-4.9 per cent payout and shorter tenor of the new preference shares are seen as "investor friendly" and attractive relative to a recent perpetual issue by United Overseas Bank (UOB).

In July, UOB sold $850 million of perpetual notes paying 4.9 per cent that were Basel III compliant. Yesterday, the notes were quoted at $102.35-$102.85, yielding 4.335-4.219 per cent.

"Instead of a price nearer to 4.2 per cent, they're (DBS) paying 4.7-4.9," said a banking source.

Still, some investors sold off the existing DBS preference shares after the announcement, causing prices to fall to $100.51-$101.398 from $102.52 on Wednesday. They could be only looking at the exchange at par, and not the coupon of the new bonds, suggested the source.

Said Gary Dugan, Coutts chief investment officer for Asia and Middle East: "Anything (bank perpetuals) above 4 per cent is attractive."

Interest rates are likely to remain low for the next 2-3 years and perpetuals still remain very attractive, he added.

Under MAS Notice 637, effective on Jan 1, 2013, Tier 1 securities have a point of non-viability (PONV) loss-absorbing feature. What this means is that investors or debt-holders will have to face a partial principal writedown or conversion into common equity when the PONV is being triggered by MAS. The PONV is triggered when MAS decides that a bank is no longer viable, or when public-sector support is required.

Separately, a UOB spokeswoman said that the bank would not comment on future capital management plans, when asked if it might consider similar exchanges for its non-Basel compliant preference shares.

At OCBC Bank, Ang Suat Ching, its head of funding and capital management, said that "while our existing preference shares are not Basel III compliant, they will continue to qualify substantially as additional Tier 1 capital over the next few years under MAS's transitional Basel III rules".

"Our Tier 1 capital adequacy ratio as at end-September was 14.3 per cent, a level that we are comfortable with. We continuously assess our capital and financial requirements, as well as market conditions, in determining any early redemption or new issuances of capital instruments."