DBS Group’s first US dollar-denominated Additional Tier 1 offering set a new record for the lowest coupon on any US dollar bank hybrid. Priced at the trough of the US rates cycle, that achievement looks likely to stand for some time.
The US$750m perpetual non-call five securities was priced on August 30 at 3.6%, comfortably beating the 4.25% record set earlier in the year by ICBC (Asia). To put that in context, Europe-based lenders HSBC and Societe Generale had AT1s callable in 2020 trading at 5.43% and 8.45% at the time.
Asian investors were key to the Reg S deal’s success – as they were in many bank capital issues during the year. But while state-owned ICBC benefits from the support of cash-rich government-linked investors, DBS needed to convince a broad range of buyers that a private-sector, Singaporean bank (albeit one owned to a large degree by government entities) warranted a tighter yield than even China’s biggest lender.
It took DBS and its bankers a series of gutsy calls to break through the 4% threshold, and even syndicate bankers on the deal had their doubts at first.
However, the leads were confident they could find demand for a sub-4% AT1 from Asian investors who had participated in similar issues from Chinese banks. They also correctly judged that investors were hungry for yield and willing to play even during the summer season, justifying a print ahead of an expected September rush.
Those bets paid off handsomely. Even though initial price guidance at 4% was already a record low coupon, DBS was able to shave off another 40bp from the kick-off point.
The bonds also performed well in the secondary market, trading up on the first day and holding around par by early November.
DBS was sole global coordinator, and served as bookrunner with Citigroup, Deutsche Bank, HSBC and Societe Generale.
“DBS was the market leader in identifying the evolving institutional investor interest for a non-Chinese Asian AT1, and has set the benchmark for all regional banks in terms of execution strategy and seizing a unique market opportunity,” said Lee-Shin Koh, a director in capital markets origination at Citigroup.
Asian banks such as State Bank of India and Woori Bank wasted no time in trying to replicate DBS’s achievement, but failed to price anything through the 5% mark even with their state links.
Even Australian and European issuers were said to be flabbergasted, leaving bankers scrambling for a way to do something similar and considering whether they too should be issuing AT1s only in Reg S format.