DBS Bank placed the first Singaporean benchmark in offshore covered bonds with a US$1bn three-year offering, setting the foundation for Asian banks to access international investors during challenging markets.
The long-awaited transaction, which had been flagged eight years ago, finally kicks off a new asset class for the city-state. It also provides pricing guidance for South Korea’s first statutory covered bond, which is expected to be issued by Kookmin Bank in the coming months.
Singapore and South Korea are jumping on the opportunity to tap a steady investor base even when markets turn volatile, a lesson learned at the height of the financial crisis when only the highest-quality government-guaranteed debt could be sold.
“It opens up an entirely new investor base given that the buyers of covereds are typically bank treasuries and the rate space on the asset management side,” said a banker on the deal. “It also speaks volumes of the progression of the banks here and their ability to tap global markets and be compared on a scale with the Australians, Canadians and Nordics.”
By pre-emptively setting existing covered benchmarks, covered issuers hope they will be able to raise funds from different investors in difficult times by selling high-grade bonds that are secured by mortgages and protected by law.
Market turmoil
DBS was able to put this logic to the test. The roadshow, which took place in Asia, Europe and the US from late June, was held at the peak of the Greek debt turmoil, while plummeting Chinese equities roiled global markets.
Bankers on the deal said DBS would have been able to print even against that backdrop, but decided to wait.
“The market was open but given the ability to choose the window especially for an inaugural deal, the decision was taken not to,” said one of the bankers. “It doesn’t negate the fact that in times of stress, the covered market is available. They absolutely could have done it.”
Markets began to settle in the past few weeks, supporting a deluge in covered supply from peripheral banks in Europe. The improved sentiment prompted bankers to begin marketing yesterday at around 40bp over mid-swaps.
One banker cited similarly rated CIBC’s five-year covered bonds as the main comparable, which priced at MS+47bp. A three to five-year curve differential in the covered bond market of 12bp brought fair value to around MS+35bp, which meant DBS priced its debut with little concession.
Other comparables cited were National Bank of Canada’s 2018s, which were MS+32bp.
DBS Bank did not have a liquid senior benchmark that would help gauge how tight a covered bond would fare versus its senior unsecured curve.
One banker cited recently priced Toronto Dominion’s three-year bonds which was seen around MS+53bp. DBS trades around 5bp wider, providing a new three-year DBS fair value at MS+58bp.
The senior unsecured to covered premium is around 20bp–25bp, said the banker.
The five and seven-year tenor was the sweet spot in the cascade of covered bonds seen in Europe in the past month, but DBS opted for a shorter deal.
“After the Greece headlines, and the headlines on China volatility, I think the market has moved to a lower tenor,” said Raj Malhotra, head of South-East Asia and India debt capital markets at Societe Generale. “There’s also some concern that at some point the Fed is going to raise rates so duration has also become a consideration for many investors.”
DBS Bank attracted US$1.37bn in orders for its covered bond.
Some investors had participated in previous DBS senior deals, but through different portfolios, bankers said. For example, bank treasuries would buy these bonds to meet liquidity coverage ratios. By contrast, senior unsecured bonds do not count towards LCR-eligible.
Asia took 51% of the offering. EMEA and US investors received 30% and 19% respectively.
By investor type, banks took 62% (South-East Asian banks had put in orders that covered about 20% of the deal). Fund managers received 19%, central banks 9%, supranational and agencies 8% and corporates and private banks 1% each.
Bayfront Covered Bonds will guarantee the 144A/Reg S issue, expected to score ratings of Aaa from Moody’s and AAA from Fitch.
The Singapore lender had mandated itself, Deutsche Bank, JP Morgan and Societe Generale as joint global coordinators for the debut covered bonds. Barclays and Citigroup were bookrunners.
