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 makeĀ 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.