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Cash-flush investors zoom in on DBS' S$1b of perps

Analysts cite recent dearth of SGD issuances and Singapore banks' strong fundamentals for robust demand

"These banks have good international brand and presence, making their bonds more palatable for foreign institutional and retail clients." - Credit Suisse's Mr Bukitgar.


FLUSH with cash and desperate for safer assets, investors are making a beeline for local banks' bond sales.

DBS Group Holdings on Wednesday priced its S$1 billion perpetual NC7 AT1 issue at 3.98 per cent, down from the initial price guidance of 4.375 per cent, following sizzling demand. The deal had garnered orders of over S$4 billion.

The perps went on sale on Wednesday morning, and by the lunch hour, orders had reached over S$2 billion. A source said: "Books have got out of control."

Market voices on:

NC7 means the issuer has the right - but not the obligation - to call or redeem the bonds in Year 7. AT1 refers to Additional Tier 1 capital, which is structured with no fixed maturity and has a loss-absorption feature which can be triggered when a crisis occurs.

A banker said of the reception to the issue when it was announced just before 9am: "It was crazy from the get-go, and some will inevitably be disappointed."

A relationship banker said: "I am not sure that even if you apply for S$2 million, you will get one lot of S$250,000." (The bonds are sold at a minimum of S$250,000.)

OCBC Bank, which put up a S$1 billion perp deal last month, also received a hot reception, which prompted the bank to tighten the pricing from the initial price guidance of 4.375 per cent to a final pricing of 4 per cent, said the bank. The final order book exceeded S$3 billion.

OCBC's perps have since traded up; they were quoted on Wednesday at 101.335. Bonds are sold at par 100.

This was OCBC Bank's second SGD capital issuance under the Monetary Authority of Singapore's Basel III framework. In the bank capital space, it was the first perpetual issuance in the SGD capital market in more than a year. In the broader SGD capital market, there has been no perpetual instruments issued since March 2018.

Last October, United Overseas Bank (UOB) sold a US$650 million 3.875 per cent perpetual issue. The price was tightened from the initial 4.15 per cent guidance, given that the deal was was four times subscribed.

Koh Chin Chin, the bank's head of central treasury unit, said the bank sold these perpetual securities in the international US dollar market as it was a chance to lock in attractive funding levels with costs on par with what would have been achieved in the Singapore dollar market.

"Issuing in USD also supported the bank's need for international currencies and diversified our investor base beyond the domestic SGD market, with the focus on institutional investors," she said.

Fixed-income players said the banks' perps are sought after because they are regarded as safe assets, especially in currently-volatile markets.

Samuel Chan, Standard Chartered Bank's head of capital markets in Singapore, said: "The three Singapore banks have been ranked among the safest banks globally. They have a proven track record of calling their perpetual bonds on the first call dates, giving investors confidence that fair value and tenor risk can be accessed on the same basis."

DBS was last month named the world's best bank by Global Finance magazine, making it a first for an Asian or Singapore bank. Global Finance has also called DBS Asia's safest bank since 2009.

The ongoing crises in Turkey and Argentina have unnerved investors, prompting them to remain on the sidelines.

Santosh Bukitgar, Credit Suisse private banking, emerging markets fixed-income analyst, said the lack of liquidity and trade volumes in August is evidence of this. The local bond market has only had S$13 billion in issuances so far this year, down 23 per cent.

Financials (52.5 per cent of amount issued) and government sectors (42.3 per cent) have dominated with higher-than-normal issue size.

Quality SGD bonds issued by sovereign issuers during late H1 and early H2 attracted keen interest and were priced, in Credit Suisse's view, on the more expensive end for their tenure.

"The bonds issued by local banks have provided relatively better yields for yield-starved SGD investors. These banks have good international brand and presence, making their bonds more palatable for foreign institutional and retail clients," said Mr Bukitgar.

Devinda Paranthanthri, UBS global wealth management, Asian credit strategist, said bank debt provides investors with a better yield pick-up than senior bonds, while remaining invested in a high-quality financial issuer.

"Singapore banks' fundamentals have been improving, with decent loan growth, sound capital levels and improving asset quality. It is thus unsurprising to see strong demand for AT1 issues by the banks."

Ang Chung Yuh, iFast senior fixed-income analyst, said: "Our observation is that the strong demand is probably due to the combination of a dearth of SGD issuances in the past few months that provide acceptable yields with good credit quality, and weaker investor sentiment toward speculative credits."

He noted the subdued reception for Perennial Real Estate Holdings' S$180 million two-year 5.95 per cent issue sold last month. After the books closed, there were said to be around S$200 million - a rather weak figure, especially considering that insiders accounted for 26.4 per cent of the issue size, subsequently upsized to S$180 million, said Mr Ang.