UOB prices first tier 2 bonds under Singapore’s new regulatory regime

The tier 2 bonds were the first issued under the new regime installed by MAS in late 2018 concerning recapitalization of failing banks

On April 8, United Overseas Bank (UOB) priced US$600 million Basel III-compliant tier 2 bonds, representing the first such offering under Singapore’s statutory bail-in regime for banks.

The Reg s/144A 10-year non-call five deal was priced at 99.657% with a coupon of 3.75% to offer a yield of 3.826%. This is equivalent to a spread of 150bp over the US treasuries, or 25bp tighter than the initial price guidance of 175bp area.

This is described as the lowest spread achieved by an Asian issuer for a Basel III-compliant US dollar tier 2 bonds and represented a negligible new issue concession.

If the notes are not redeemed or purchased and cancelled on the first call date, the interest payable on the notes from the first call date to the maturity date shall be reset to a fixed rate equal to the then prevailing five-year US treasury rate plus the initial spread of 1.50%. There is no step-up feature in the offering.

The notes are intended to qualify as tier 2 regulatory capital for UOB. Upon the occurrence of a loss absorption event, the bank says the notes may be written down, in whole or in part, and any accrued and unpaid interest may be cancelled in respect of each note.

The transaction generated a final order book of more than US$3 billion from 176 high-quality accounts, with 40% of the bonds sold in the US, 35% in Asia and 25% in Europe. By type of investors, fund managers accounted for 58% of the paper, while insurance companies and pension funds took 27%, public sector 8%, private banks and corporates 4%, and banks 3%.

Proceeds from the offering, which was drawn from UOB’s US$15 billion global medium-term note programme, will be used for general corporate purposes. Citi, Credit Suisse, HSBC, Standard Chartered and UOB acted as the joint bookrunners and lead managers for the transaction.

Singapore unveiled enhancements to the resolution regime for financial institutions, which came into force on October 29 2018. It provided the Monetary Authority of Singapore (MAS) with the power to intervene and manage a within-scope financial institution at the point of non-viability (PONV) to facilitate the orderly resolution of such financial institutions.

The statutory bail-in powers of MAS, as outlined by law firm Linklaters, are intended to help recapitalize a failing bank so that it is the shareholders and the creditors, rather than the taxpayers, which are first in line to meet any losses.

Under this regime, MAS has wide powers to step in and cancel, modify, convert and/or change the form of eligible instruments of a failing bank to facilitate its orderly resolution. The bail-in regime gives MAS certain grounds for stepping in when it thinks that the eligible instruments ought to be bailed-in to facilitate the orderly resolution of a failing bank or such bank’s assets do not or are unlikely to support payment on its liabilities as they become due and payable.

In December 2018, Moody’s Investors Service upgraded from A3 to A2 the ratings assigned to the subordinated tier 2 PONV securities of OUB, along with those of DBS and Oversea-Chinese Banking Corporation, in line with the statutory bail-in resolution issued by MAS.

Moody’s notes the statutory bail-in powers reduce the risk associated with Singapore banks’ tier 2 contractual PONV securities by removing the uncertainty associated with the timing of a principal write-down of tier 2 PONVs.

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Date

11 Apr 2019

Channel

Capital Markets

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