Singapore finally comes good with first covered bond

In the run-up to the trade, DBS had embarked on a global roadshow spanning Asia, Europe and the US, mandating itself, Deutsche Bank, JP Morgan and Société Générale as joint global co-ordinators to run the meetings.

It also sought and obtained the European Covered Bond Council (ECBC) covered bond label, the first time the designation had been granted to an issuer outside the European Economic Area.

“This has been a long time coming,” said Yeoh Hong Nam, DBS head of wholesale funding, corporate treasury. “It’s not a trivial exercise internally for a bank to tap this market as there are so many mechanics involved, from setting up the required infrastructure to ensuring regulatory requirements are met.”

The investor meetings ended at the start of July, although the fallout from the Greek debt crisis meant a deal was out of the question. DBS then went into a two week accounting blackout and the deal was only cleared to launch once the bank's financials had been released on July 27.

That delay proved to be a blessing in disguise, as the covered bond market was one of the first asset classes to rebound as the worst of the Greek crisis appeared to subside. Some $18bn of covered bonds priced in the two and a half weeks leading up to DBS's deal. Within that issuance spree, four names — Bank of Nova Scotia, Bankia, Bank of Montreal and LBBW — came on July 28 alone for a combined $4.2bn.

With market conditions looking far more conducive than when its roadshow had ended, DBS opened books on July 29 for a three year offering at 40bp over mid-swaps.

The deal was long-awaited, but the Singaporean lender still had some surprises up its sleeve. Not only did it launch the trade during the Asia session, but it also opted for dollars. Covered bonds typically kick off during the London open if they are euro denominated and during the New York open if in dollars.

“Without a doubt Europe is the home of covered bonds, so I was quite surprised that they had gone for dollars instead,” said a Hong Kong-based DCM banker away from the deal.

But Raj Malhotra, Société Générale’s head of southeast Asia and India, DCM, said that Australian and Canadian lenders had printed covered bonds in dollars before, so it was not necessarily true that one currency was always better than the other.

Investors were clearly of the same mind, and books ended up closing at $1.37bn with 45 bids.

That enabled DBS to cut guidance even further, to 37bp over and the 1.625% bonds were eventually sold at 99.948 to yield 1.65%. The bank opted to raise $1bn.

Asia took 51%, with Europe, Middle East and Africa taking 30% and the rest going Stateside. Banks bought 62%, fund managers 19%, central banks 9%, supranationals 8%, corporates 1% and private banks 1%.

In the eyes of one structured finance specialist working on the trade, the diverse mix of investors in the book vindicated DBS’s decision to pursue a dollar trade.

“Regardless of the currency, DBS was entering a new market anyway, but since the aim of this inaugural issue was mostly to build a benchmark and get the bank’s name out there as much as possible, dollar was the more obvious choice,” he said.

There are no direct comparables for the DBS deal thanks to what the banker calls “a uniquely Singapore structure” and the deal being the maiden covered bond out of the country.

The bonds were instead referenced against National Bank of Canada’s $750m 1.4% 2018s, Royal Bank of Canada’s $500m 2018 FRN and Westpac’s $800m 2018 FRN. The former was trading at 32bp over mid-swaps, while the latter two were both quoted at 30bp over three month dollar Libor.

Once curve extension had been taken into account, the Singaporean lender came roughly 2bp wider than those comps, which according to the banker was an excellent result considering its “first of its kind” status.

“We have been actively engaging key investors over the past one and a half months to ensure they had credit lines in place and to get them familiar with the programme structure and credit, so we had a good sense of where pricing and demand would end up,” DBS’s Yeoh said.

“This is an AAA issuance from an Aa1 bank in a new AAA jurisdiction, so the scarcity and diversification opportunity offered to bank portfolios were strong points to engage investors on.”

The bank was also able to shave more than 20bp off its conventional dollar funding and a lot of the deal’s success was down to the comprehensive roadshow earlier — which dispelled most, if not all, of investors' lack of familiarity with the credit, the structure and Singapore’s banking sector, as well as worries about the country’s housing market.

The first three points were easy enough to sell, but bankers on the trade admitted that investors harbour quite some doubts about the state of the Singapore housing market, with many questioning whether the sector is overinflated.

“That, for me, was really the key because many global investors are not familiar with Singapore and we really had to go out to convince them that, unlike what the mainstream media had been reporting, the housing market here is highly controlled — so a bubble is extremely unlikely,” the structured finance head said.

That can be reflected by a series of cooling measures the authorities introduced since 2009, which contributed to a fall in property prices of around 10%. The government has reiterated many times in the past that it would not mind seeing further price reductions.

Now that the first deal is finally done and dusted, market participants are expecting further issuance not just from DBS, but also Oversea-Chinese Banking Corp, United Overseas Bank and other locally incorporated foreign banks.

The maximum issuance size of the covered bond market in Singapore is estimated to be around $30bn, based on the banking sector’s total assets.

The country’s second covered bond is expected to launch this year, and the three major local banks have already come into an understanding that any future issuance will come with the same basic set of principles in terms of indexation, structure, valuations and disclosures.

“We’ve managed to get the first one done, we’ve not yet landed on the moon but at least the rocket is up there, so I’m pretty confident some of the other Singaporean lenders will also follow,” said Ralf Grossmann, Société Générale’s head of covered bond origination.

The bonds were trading 2bp tighter in the evening of July 30. Barclays and Citi were joint bookrunners.