March 11, 2014 / 12:11 PM / in 4 years

Asian banks rush to top up capital as stars align

* Australia, Japan and Singapore set for landmark subordinated bonds

* Move comes amid surge in global demand for riskier bank debt

* Favourable cross-currency swaps add to the allure for Asian issuers

By Christopher Langner and Frances Yoon

SINGAPORE, March 11 (IFR) - Global enthusiasm for subordinated bank debt is reaching Asia, with at least two landmark offerings of so-called “bail-in” bonds set to price before the end of this week.

Australia and New Zealand Banking Group and Singapore’s United Overseas Bank are each marketing their first US dollar issues of Tier 2 securities since the introduction of Basel III rules, while one of Japan’s major lenders is expected to announce a similar deal later this week, according to sources close to the deal.

In all three cases, the deals will set new benchmarks for capital securities that leave investors exposed to principal losses should the bank run into trouble.

Asian banks have so far preferred to tap their domestic markets to top up their Tier 2 capital, finding the far bigger, international market too expensive.

The first US dollar Tier 2 issues from Australia, Singapore and Japan, therefore, confirm that the global markets are open for Asian issuers at an attractive price.

The deals come amid a surge in appetite for subordinated debt as investors step up their hunt for higher-yielding assets.

“(In the past few months) you have seen institutional investors in the US and Europe, who were mostly absent from bank capital transactions early last year, entering these deals and seriously competing for the bonds,” said a senior DCM banker in Hong Kong.

Nationwide Building Society, Danske Bank and Banco Santander received the equivalent of 41bn of demand for their inaugural Additional Tier 1 (AT1) issues last week, a phenomenal result considering that the bonds come with a significant risk of loss.

The added demand is making it cheaper for lenders to raise their capital - Danske’s Additional Tier 1 came at 5.75%, the lowest coupon yet for the loss-absorbing structure.


In a time when there is high demand for safe assets, but investors still want yield, bankers say subordinated bonds from a high-rated bank fit the bill perfectly.

“At the end of the day, investors still need to put cash to work,” added a credit analyst in Singapore.

Australian, Japanese and Singaporean banks are all rated high Single A or even Double A. That means that even their subordinated debt, which is typically rated up to three notches lower, is still in the Single A or high Triple-B category - well above the investment-grade threshold.

Indeed, Singapore’s UOB (Aa1/AA-), has received an A+ rating from Fitch for its Tier 2 bonds.

“How many Basel III bonds can you find with an A+ rating?” said a syndicate banker in Singapore.

In spite of the still very high rating, the new bonds were being offered at 250bp over US Treasuries, a level that represents a 100bp premium over UOB’s outstanding dollar-denominated Tier 2 bonds due in 2022. The outstanding bonds, issued under the Basel II regime, are considered less risky as they do not contain a write-down clause.

The same applies to subordinated bonds from Australia and Japan. Australia and New Zealand Banking Group, which is rated Aa2/AA-/AA-, for instance, announced that it had mandated ANZ, Citigroup, Goldman Sachs and UBS to lead its first dollar-denominated Tier 2 bonds with write-down clauses. The deal is expected to price tonight during US hours.

Bankers in Tokyo expect Sumitomo Mitsui Banking Corp, rated A/A-, or Mizuho Financial Group (A/A-) to be the first Japanese lender to announce a US dollar Tier 2 bond, potentially as early as Thursday.

Besides lower yields and higher demand, some of the banks will also benefit from an improvement in the level of cross-currency basis swaps.

Five-year US dollar/Australian dollar swaps, for instance, touched 19bp in late February, their lowest level since December 2011.

The swap levels may mean that it has become cheaper for overseas issuers to raise money in US dollars and swap it. According to one credit analyst, on a swapped basis, UOB’s transaction may even turn out to cost less than the bank’s Singapore dollar subordinated paper. (Reporting By Christopher Langner and Frances Yoon; editing by Steve Garton)

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