Investment Grade Bond

IFR Asia Awards 2016
3 min read
Frances Yoon

DBS’s first US dollar-denominated Additional Tier 1 offering set a world record with 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 priced on August 30 at 3.6%, comfortably besting the 4.25% record set earlier in the year by ICBC (Asia). To put that in context, 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. But while ICBC has the Chinese government behind it, and 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 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 in the beginning.

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.

Those bets paid off handsomely. Even though initial price guidance at 4% was already a record low, DBS was able to shave off another 40bp from the kick-off point.

The bonds also performed well in secondary, 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, director, capital markets origination at Citigroup.

The perpetual non-call five securities came close to rivaling peer UOB’s outstanding Tier 2 bonds callable in 2021, which were trading around 3.58%. Tier 2 bonds are higher in the capital structure and therefore deemed safer than AT1s.

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.

To see the digital version of this report, please click here