New Issue Review : ABN AMRO Bank N.V. SGD Tier 2
10Y NC 5Y
Indicative Coupon 5% Issue Size SGD 500 mio min. 100% owned by Dutch government.
I find it odd that UBS would be bringing out a European Sub when they just sent this out on 16 Oct.
Subordinated bonds: Time to take profits on subordinated financial bonds
“Driven by a strongly positive sentiment shift after the ECB’s August announcement of its conditional bond purchasing program, subordinated bank bonds have appreciated markedly over recent weeks as investors hunt for yield.
We think valuations are now too stretched in light of the various economic, regulatory, and issuer as well as security-specific risks, which we feel are currently being underestimated by many investors.”
Then we have this headline from the Financial Times yesterday.
Fund managers warn on corporate bonds
“Overbought ? Europe’s corporate bond rally is running out of steam”
Then we have this mega ABN issue in SGD. Because the Singapore market does not care ?
Highlight in Prospectus
Statutory Loss Absorption
Subordinated Notes may become subject to the determination by the Relevant Authority or the Issuer (following instructions from the Relevant Authority) that all or part of the nominal amount of the Subordinated Notes, including accrued but unpaid interest in respect thereof, must be written off or converted into common equity Tier 1 instruments or otherwise be applied to absorb losses, all as prescribed by CMD (“Statutory Loss Absorption”). Upon any such determination, (i) the relevant proportion of the outstanding nominal amount of the Subordinated Notes subject to Statutory Loss Absorption shall be written off or converted into common equity Tier 1 instruments or otherwise be applied to absorb losses, as prescribed by CMD, (ii) such Statutory Loss Absorption shall not constitute an Event of Default and (iii) the Subordinated Noteholders will have no further claims in respect of the amount so written off or subject to conversion or otherwise as a result such Statutory Loss Absorption.
The Subordinated Notes will not be subject to Statutory Loss Absorption if and to the extent the CMD is not deemed to apply retrospectively with respect to such Statutory Loss Absorption.
It is a grey area, according to my bond expert friend. No finalised decision yet and whether the losses can imposed retrospectively on existing bond holders.
So far, the Asian subs have not included this clause and it seems only the European banks are inserting it discretely into prospectuses.
It does look remote if Netherlands will make Tier 2 bond holders of a state owned bank absorb losses before equity losses but there is a small possibility of that to consider.
Pricing wise, at 5% it is a fair deal because if you swap the current ABNANV USD 6.25% 09/2022 (callable 2017) into SGD, you will be getting the 5% too. Plus the “old style” sales pitch which is misleading to a degree.
However, the books are over SGD 2 bio and growing. It probably means the coupon is likely to come out sub 5% which makes it a tough call.
Given that the SGD dollar is likely to rally, it makes sense if you are offshore to buy into this as the currency will appreciate. I am hearing banks are extending 50% leverage on this paper as well which gives a rough 9% return on capital based on the 5% coupon.
For me, I am not paying more than 4.75% for it. So that is the limit order.
I hope readers will find this useful.
Oh.. New SGD bond. An entity that is 100% owned by a AAA country (The Netherlands), Trading decisions are: 1) buy a lot or 2) buy a little. Afterall, that had been the standard operating model for the recent past, and it had been hard (but not totally) to go wrong. Couple that with the latest MAS statement – shouting SING DOLLAR APPRECIATION at you, close two eyes and buy.
Hold on a minute! The loss absorption clause. Something we have not seen in Asia, which as mentioned above, makes this issue loss-absorbing if it fails. Yes, there is a pick up over “Old Style” T2 which “frontload” you with more coupon and risk a loss on capital. A tactic that taps on immediate gratification which we human beings are so used to. (It made me sit up to look at this 5% bond closer
The numbers behind:
UOBS 3.15 due Jul 2022, callable Jul 2017 (Issue rated A+ by S&P) trading at 2.96% (ASW+214bp). THIS IS OLD STYLE T2.
New ABN 22nc17 (issue likely to be rated as BBB+ by S&P, indicating 3 notches lower than the UOB). My back of the envelop addition tells me this should be ASW+315 (if old style), indicating a 4%. So this new one at 4.7% is telling you the premuim of that “if i die, i drag you down” clause is worth 70bp. Worth it?
Chase the bond but don’t get too sentimental on this. Come 1 Jan 2013, it will be a totally new ball game. Get yourself updated with what entails in the new definition of T2 capital. (find it on page 26 here http://www.bis.org/publ/bcbs189.pdf)
Trade and invest wisely.
Not stupid at all, Stupidboy.
9 billion books for an initial SGD 500 bio (final 1 bio) issue. 4.7% for 5% initial cpn.
Looks like we are selling insurances on something we are not aware of, and not even MAS will be able to save us then.
Better pray for “grandfathering” then. But it also looks like we will have our own stupidity to blame if they will not give it to you for free.
Still will expect a mini rally tomorrow, whether its worth it or not.
Starting to look like politics to me, the hostage game.