DBS Bank (Aa1/AA–/AA–) rode on the scarcity value of Singapore bank mortgage-backed paper for a €750m (US$744m) three-year note that was the only one of three euro covered deals to tighten Tuesday in challenging market conditions.
The notes priced at mid-swaps plus 17bp, tightening from initial guidance of 19bp area. The other two euro covered notes – a €500m five-year debut from Unicredit Bank Czech Republic and Slovakia and a €1bn four-year piece from Bank of Montreal – stalled at guidance to price at mid-swaps plus 55bp and 17bp, respectively.
“The covered bond is a reliable funding tool, especially in uncertain markets,” said Chris Ngooi, DBS Bank’s head of wholesale and structured funding. “It gave us access to sizeable funding at a relatively attractive cost of funding given its AAA rating.”
The well-received deal could encourage other Singaporean banks to launch similar transactions to boost cash buffers in a cost-effective format.
United Overseas Bank was heard to have completed a series of non-deal roadshows in Europe in September, while OCBC Bank recently updated its US$10bn global covered bond programme.
“DBS is a relatively rare global name in the euro covered bond market,” said Winston Tay, ING’s head of Asia Pacific bond syndicate and FIG DCM.
“They had conducted comprehensive physical investor meetings in recent weeks and in today’s market, these face-to-face meetings – coming after a couple of years of virtual sessions – made a huge difference at the end of the day especially given how volatile the markets are. It helped to differentiate them from their global peers and ensured investors fully understood the DBS proposition.”
Orders for the DBS deal were over €1.15bn, including €75m from lead banks, when the final pricing and issue size were announced. The UK and Ireland were allocated 39.1% of the bonds, Germany and Austria 36.7%, Benelux 11.7%, Switzerland 9.1%, the rest of Europe 2.7% and Asia 0.7%. About 59.5% went to banks, 19% to asset managers, 18.1% to central banks and SSAs, 2.7% to pension funds and 0.7% to private banks.
The deal was the opportunistic result from investor feedback given during the meetings, with DBS choosing to go with the euro currency to add to its US$1.5bn five-year 144A/Reg S covered bond sold at SOFR mid-swaps plus 65bp in March.
“The defensive nature of the offering meets investors’ appetite. Singapore gives them credible alternatives and robust ratings with the sovereign rating at Triple A, and a Double A rated bank offering a Triple A rated product,” said Ngooi.
The weak response to Bank of Montreal and UniCredit also underscores broad investor wariness in volatile global markets, even to covered bonds which are considered a safe shelter in financial storms.
“Investors have become very careful about what assets they put their money in, and we saw that reflected in how the other two deals could not tighten from guidance,” said a Singapore-based banker on the DBS deal.
DBS benefited from the strategy that embraced physical meetings with European investors during a mega non-deal roadshow that was anchored around the European Covered Bond Council Congress in Vienna on September 22.
“During the non-deal roadshows, European investors said they appreciated that the issuer made an effort to physically travel to meet them, and it showed in the deal results,” said the Singapore-based banker.
The DBS covered bond paid a new issue premium of about 8bp, just below the fair value estimated at 9bp–10bp. On an adjusted duration curve, the deal was priced around the same level as Bank of Montreal’s note – a feat, given that covered bonds from Singapore banks typically trade at a premium of about 3bp–4bp over those from their Canadian peers.
The tight pricing is also due to the rare supplies of Singapore bank euro covered notes versus Canadian paper. This year has seen only United Overseas Bank with a €1.5bn 0.387% three-year piece in March. Canadian banks have sold more than €25bn of covered notes to date this year, and this does not include their forays in other currencies.
"In the mortgage sectors, Singapore is seen as having a very stable property market with little volatility," said a second Singapore-based banker on the deal, and that helped boost DBS’s mortgage-backed paper.
The Singaporean bank is keep meeting its wholesale funding needs in an opportunistic way.
“The year is drawing to a close, so we decided to do it earlier rather than later. Next year is expected to be volatile but we remain engaged to take advantage of short window of opportunities by moving quickly,” said Ngooi.
“At the end of the day, wholesale funding helps diversify and broaden our funding options and it is extremely important to stay engaged in this space.”
The Reg S global covered bond, to be rated Aaa/AAA (Moody’s/Fitch), is backed by Singaporean residential mortgage loans.
Bayfront Covered Bonds is the guarantor for the 2.812% notes, which priced at par. Settlement of the SGX-listed bonds will be on October 13.
DBS Bank, Helaba, ING, Natixis, NordLB and Societe Generale were joint lead managers.
Updated story: updates with revisions in para 8