Strong demand for UOB's $750 mil perps

SINGAPORE (July 11): Perpetual capital securities have had something of a bad rap in Singapore following Hyflux’s default of its retail issuance of $900 million of perpetual capital securities and preference shares (PnP), where some 34,000 retail investors have lost their capital. DBS Bank was the sole financial adviser and manager for Hyflux’s retail issuances in 2013 and 2016.

Fast forward to 2019, a completely different issuer which is one the highest rated banks in Asia, a different global co-ordinator, different lead managers and for different investors.

UOB on Thursday announced that it issued $750 million of perpetual capital securities with a fixed rate of 3.58% a year.

This is subject to a reset on the first reset date (and every seven years thereafter) to a rate equal to the then prevailing 7-year SGD swap offer rate plus the Initial Spread of 1.795%.

UOB is the sole Global Coordinator, and joint lead manager along with Australia and New Zealand Banking Group, Standard Chartered Bank (Singapore), HSBC Singapore Branch and UBS AG Singapore Branch.

The perpetual securities qualify for additional tier 1 (AT1) capital and hence are loss absorbing.

As such, they will be subordinated to the bank's senior creditors, including covered bondholders, depositors and holders of Tier 2 capital securities of the bank, in priority of claims.

However, they will rank ahead of claims by UOB's ordinary shareholders.

Interestingly, the distribution yield of 3.58% implies that the historic dividend yield on ordinary equity is higher at 4.51%, based on the $1.20 dividend paid for FY18.

UOB is committed to paying a dividend of $1 for its ordinary shares, which translates into a yield of 3.76%.

According to Sean McNelis, co-head of Debt Capital Markets for Asia-Pacific at HSBC, the UOB deal is the lowest ever yield for a Basel III SGD AT1 transaction.

“At 3.58%, this is well below the coupons achieved on the 3.98% DBS and 4.00% OCBC transactions,” McNelis tells The Edge Singapore via email. “Despite around 4% being widely accepted as the yield bogey in SGD space, there was conviction that investors can be tested much lower, which was the right call.”

Demand was so strong that the order reached $1 billion by 11am on July 11 – just two hours after opening.

Despite lower yields, the orderbook closed at $2.8 billion from over 105 investors, in line with the largest orderbooks seen in recent transactions, McNelis says.

Private banks accounted for 50% of the tranche, followed by fund managers with 21%, insurance funds with 20%, public sector entities with 6%, banks with 2% and corporates with 1%.

“Other AT1 stats have averaged 75% or more in private banking [demand] with lower institutional bids,” McNelis indicates.

In addition, there was a higher degree of foreign participation, with 9% distributed outside of Singapore.

In comparison, DBS’ 3.98% AT1 perpetual capital securities had just 6% of demand from outside of Singapore and this was also lower than OCBC’s 4% AT1 perpetual capital securities with 7% of investors from outside of Singapore.

Fitch Ratings rates the $750 million issue as BBB(EXP), five notches below UOB's 'aa-' Viability Rating.

Of the five notches, two notches are for loss severity and three notches for non-performance risk.