Tepid reception to DBS Tier-2 bonds shows risk aversion

[SINGAPORE] Hopes that a spree of bank capital issuance would prop up the sluggish Singapore dollar bond market took a blow last week with the tepid reception to a Tier 2 offering from DBS Group. On paper, the offering was a perfect match for investors hungry for safe havens in a period of heightened volatility.

However, even Singapore's biggest banking group was not completely immune to weak global markets and had to settle for modest takings. DBS sold a S$250m 12-year non-call seven subordinated bond - its first Basel III-compliant Tier 2 - at a yield of 3.8 per cent last Wednesday. The pricing came in slightly higher than initial guidance of high 3 per cent, typically taken to indicate a target of 3.75 per cent.

The issue drew a book of S$300m from 52 accounts, prompting rival bankers to point out that the deal had difficulty attracting investors, despite the higher-than-expected yield.

"In current volatile markets, investors are just too averse to risk, and issuers looking to sell bonds must be prepared to temper their pricing and deal size expectations," said one head of debt origination.

That said, the 3.8 per cent yield translated into 110bp over Singapore dollar SOR, a rather tight spread for bonds that are subordinated and subject to regulatory writedown triggers.

DBS, aware of investors' jitters, had also targeted a modest size of S$200m to S$300m.

"It was a reasonable trade that achieved good pricing," said one debt syndicate banker, observing that the modest size reflected the current liquidity available in the market.

The episode suggests that foreign banks seeking to raise subordinated bank capital in Singapore may also have to adjust their expectations.

Among the names checking the market are banks that have raised T2 paper in the local market before, such as Australia and New Zealand Banking Group and ABN Amro, as well as those that have not, such as Commonwealth Bank of Australia and Societe Generale.

ANZ was said to be eyeing a deal in the latter half of last week, before Asian stocks tumbled once again on Thursday. ANZ sold its first Basel III T2 in Singapore last March with a S$500m 12-year non-call seven at 3.75 per cent, a size no other foreign bank had since been able to match. Investors said there was still liquidity in the market as there had been a lack of high-grade paper and they needed to put their funds to work.

They suggested the main obstacle to the foreign banks launching deals was pricing.

ABN AMRO had been indicating a spread of around 200bp over SOR the previous week for a 10 non-call five T2, but investors wanted 20bp more and pushed back.

The worsening market conditions last week would have raised investor expectations to 240bp and above for an ABN trade.

Some bankers are not expecting a wave of new T2 notes due to the market volatility, but others disagree, pointing to Singapore's proven appetite for bank capital and the relatively low funding costs set by benchmark issues from local banks.

"The issuers will just have to do the deals piecemeal rather than a single large issue," said a banker involved in one of the planned transactions.

"There is no place for ego in these choppy times."

REUTERS