The long-awaited covered bonds out of Singapore finally came through when DBS on July 30 successfully priced a US$1 billion offering – achieving a level which it says was well below that of new senior unsecured US dollar debt issues by bank issuers of similar rating to DBS.
The Reg S/144A three-year deal was priced at 99.948% with a coupon of 1.625% per annum - equivalent to a spread of 37bp over mid-swaps, or 3bp tighter than the initial price guidance of 40bp area. The bonds performed in early secondary market trading and were quoted 2bp tighter at 35bp in early afternoon of July 30.
The deal was guaranteed by Bayfront Covered Bonds Pte Limited and represented the first issuance under the bank’s US$10 billion global covered bond programme established in June this year.
DBS did an extensive roadshow in Asia, Europe and the US from the middle of June to early July and met with its existing and new investors, to introduce its covered bond programme and update them on DBS’ credit status and Singapore's macro story.
The Greek crisis put a dampener on the markets globally, so once they completed the roadshow, the global coordinators advised DBS to watch and monitor the markets. “When DBS published its 2015 second quarter results on July 27, we felt at that stage that there was a good window to launch the transaction as the Greek issue appeared to have stabilized,” says Raj Malhotra, head of debt capital markets for Southeast Asia and India at Societe Generale CIB.
Since this is a debut issue and a new asset class out of Singapore, there was no direct comparison. “DBS’ closest peers – the Australian and Canadian banks – are active issuers of covered bonds and have established curves in the market and that’s where the investors focused on,” Malhotra points out. “These banks in recent weeks have printed deals in the low 30bp area. For DBS to price its transaction at 37bp over mid-swap, it is a very positive outcome. It is an attractive cost of funding for the bank, it opens a new market and it provides broader investor diversification.”
The issue attracted total orders of US$1.37 billion from 45 accounts with banks anchoring the demand as they accounted for 62% since this asset class is well suited to their treasury books. Fund managers took 19%, central banks 9%, supranational and agency 8%, and corporates and private banks 1% each. Orders were received across 16 countries with a high level of representation from Asia at 51%. Another 30% was distributed in EMEA and 19% in the US.
“Covered bond investors are very specific about their orders. The US$1.37 billion book is of extremely high quality and more than adequately supported the US1 billion trade,” Malhotra points out.
“There is no inflation in the book as the investors put in the allocation that they want, adds Ralf Grossmann, head of covered bond origination at Societe Generale CIB. “We had a bit of volatility recently, which made investors cautious, but despite that we had the strongest July ever in the covered bond market in Europe with close to US$18 billion worth of supply. This shows the resilience of this asset class.”
DBS chief financial officer Chng Sok Hui cited the strong interest that the transaction attracted from global investors, which allowed the bank to price the bonds at tight spreads even under current difficult bond market conditions. “With the issue, we have been able to engage a fresh group of investors and access liquidity with greater cost efficiency,” she points out. “This inaugural issuance is a milestone for the Singapore covered bond market and it paves the way for greater participation in the future by investors and issuers in this new asset class.”
The issuance and competitive pricing follows the bank’s announcement of strong results in the first half of 2015 where its total income exceeded S$5 billion for the first time to S$5.43 billion (or up 14%) on the back of improved net interest margin, broad-based fee income and stronger treasury contribution.
DBS was granted the ECBC (European Covered Bond Council) Covered Bond label on June 29 2015 – the first quality label granted by The Covered Bond Label Foundation to an issuer outside the European area and further enhanced the visibility of DBS’ covered bond initiative to global investors.
Net proceeds from the covered bonds will be used for the general business purposes of the DBS Group.
Covered bonds are rated higher than senior unsecured debt as investors have recourse to both the issuer and a portfolio of mortgage loans and other assets. Apart from Singapore, South Korea is also likely to see more momentum in covered bond issuance in Asia. Other countries in the region are still at very early stage in terms of exploring and setting up the framework for covered bonds.
DBS, Deutsche Bank, J.P. Morgan and Societe Generale CIB were the joint global coordinators for the transaction, as well as joint bookrunners and lead managers along with Barclays and Citi.
