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Wednesday, 23 April 2014

Singapore embraces new-style bank capital

The Singapore bond market could become a valuable source of liquidity for European banks seeking to bolster their capital base after a heavily oversubscribed Tier 2 issue for Dutch lender ABN AMRO blazed a trail for others.

ABN AMRO CEO Gerrit Zalm speaks during a news conference to present the company's 2010 annual result

Source: Reuters/Jerry Lampen

ABN AMRO CEO Gerrit Zalm speaks during a news conference to present the company’s 2010 annual results in Amsterdam

The S$1bn (US$820m) 10-year non-call five issue - the biggest for a European lender in that market - was also the first Singapore dollar bank capital deal to make reference to upcoming regulation which will see investors in subordinated debt face losses going forward.

The staggering S$17bn order book – a record in the local bond market – stunned both the borrower and its leads, signalling that Asia was willing to support these deals at a time when European institutional investors are still wary of the asset-class.

“The market circumstances for a 10NC5 structure in Singapore dollars were favourable compared to other markets and the coupon we offered on the deal is the lowest we have offered on Tier 2 this year,” said Ruud Jaegers, deputy head of investor relations at ABN AMRO.

The Sing-dollar bond pays a coupon of 4.70%, well below the 6.25% ABN offered on a US$1.5bn 10NC5 Tier 2 issue in September and the 7.125% paid on a €1bn bullet in July. The S$17bn book also smashed the US$6bn for the US-dollar issue and €2.5bn on the euro.

The overwhelming response and the significant post-swap savings of some 55bp versus ABN’s outstanding US-dollar bonds will not have gone unnoticed in Europe.

“We are having a lot of discussions not only with European financial institutions, but with European corporations, as well,” said one Singapore-based debt origination banker. “They have sat up and taken notice of the edge that the Sing-dollar market has over the others.”

ABN Jaegers agreed. “Given the success, I can imagine that other issuers might look at that market too,” he said. “Our name recognition in the region is very good and for issuers with similar recognition it could be worth investigating opportunities given the size we were able to achieve.”


European investors have become wary of callable bank capital deals after a number of skipped call options as well as the subordinated debt asset-class after regulators imposed losses on bondholders during the crisis. However, the callable Lower Tier 2 structure remains very popular among yield-starved Singapore investors.

Aside from the city’s local lenders, at least two foreign banks – Bank of East Asia and Dah Sing Bank – have sold such structures this year, following similar deals from Standard Chartered and Malayan Banking in 2011.

“The market circumstances for a 10NC5 structure in Singapore dollars were favourable compared to other markets and the coupon we offered on the deal is the lowest we have offered on Tier 2 this year.”

Like those deals, ABN’s bonds have a coupon reset at the five-year point, but no step-up. However, the ABN transaction also includes a reference to the upcoming Crisis Management Directive in Europe, which will allow regulators to haircut bondholders in a resolution situation after 2015.

While it falls short of the kind of loss-absorption trigger seen on contingent capital deals out of Switzerland, the reference to upcoming resolution regimes was a first in the Sing-dollar market.

“People are just preparing for the coming of Basel 3 and adopting the new language,” said one Singapore-based debt banker. “So, going forward, we are likely to see more of the new style, even if it does not spell the end of the old style just yet,” she added.

ABN has raised over €2.7bn (US$3.5bn) in Tier 2 funds this year and also conducted a liability management on some of its T2 note last year, which transformed just over €1.7bn of non-eligible Tier 2 into what ABN AMRO hopes will be grandfathered.

“This is the third Tier 2 we have launched this year as we prepare ourselves for Basel 3,” said Jaegers. “A large part of our old Tier 2 debt is expected to lose (partial) eligibility (next year) as it is callable with step-ups and, therefore, does not comply with the new Basel requirements.”


ABN AMRO offered a higher yield to compensate investors for the language, even if the overwhelming response suggests that Singaporean buyers largely chose to ignore it.

“This is something we discuss extensively with investors to make them aware of pending regulations,” said Jaegers.

Although some investors were concerned about exposure to the European sovereign peripheral debt issues, ABN’s is modest.

CreditSights said it had €0.4bn exposure to Italy and Spain with another €1.2bn gross exposure to Greek Government-guaranteed corporations, which looked comfortable against its core Tier 1 ratio.

Its Core Tier 1 is at 11.9% with a Tier 1 ratio of 12.7% and total capital ratio of 16.2%. It aims to have a Basel III capital equity T1 ratio of at least 10% from 2013.

“There are two main things going for ABN AMRO,” said a foreign debt-originations banker. “It has a long history in Singapore and investors here know the name well, and it is 100% owned by the State of the Netherlands.”

However, it was the premium the Dutch bank was willing to leave on the table that was a key attraction.

Even after tightening 30bp from initial guidance to price at a yield of 4.7%, the new bonds still offer 79bp–164bp over old-style LT2 paper from lower-rated peers Bank of East Asia (A–) and Maybank (BBB+).

ABN is rated A2/A+/A+/A (Moody’s/S&P/Fitch/DBRS). DBS, Standard Chartered and UBS were joint bookrunners.

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