DBS Preference Share Switch
Nov. 7 (Bloomberg) — Buy back is for non-cumulative non-convertible non-voting class N preference shrs callable in 2020: DBS in exchange filing.
- DBS to accept tenders amounting to S$800m
A Holder whose Existing Preference Shares are accepted by DBSH for purchase will receive (a) Singapore Dollar Denominated Non-Cumulative Non-Convertible Perpetual Capital Securities First Callable in 2019 and with an initial distribution rate of between 4.70% and 4.90% per annum to be issued by DBSH in a principal amount equal to the liquidation preference of the Existing Preference Shares that are accepted for purchase, and (b) accrued but unpaid dividends on the Existing Preference Shares.
DBSH is proposing to accept tenders amounting to S$800,000,000 in liquidation preference of Existing Preference Shares, or a lower or greater aggregate amount at DBSH’s discretion.
For the avoidance of doubt, the Tender Offer is in respect of the Existing Preference Shares only and does not apply to the S$800,000,000 4.70% Non-Cumulative Non-Convertible Non-Voting Class O Preference Shares Callable in November 2020 (ISIN: SG2C54964409).
Nobody in their right minds will read the 133 pages of the document highlighting the rationale for the switch and the risks of holding the new perp under Basel 3 laws.
Given that there are no details on the new securities except that there will be a call in 2019, 4.7% would make the UOB trading price look a tad expensive.
Current market price is 101.50 to 102 ( 4.36-4.38% to 2020 call) last done for this bond. The new UOB perp 4.9% callable in 2018 is going at 102.50 mid (4.3%).
Why not sell out at market ? The retail issue trading in the stock market is going for 107 level, which makes this wholesale tranche look cheap and DBS is only tendering for half the total issue size of SGD 1.7b bio.
An even better idea would be to sell out at 101.50-102 i.e. do not do the switch and consider an alternative investment in say, the Sembcorp 5% perpetual callable 2018 which is still trading at 100.10 level.
Corporate perpetuals are not bound by Basel 3 and do not have a loss absorption clause. Forgive me, I am just playing the devil’s advocate.
Thanks for the tip-off Tradehaven – as this DBS issue is my single largest debt paper holding, your signal is appreciated.
I have had a quick look through the tome that DBS disclosed to the SGX this morning. I have to say that I believe DBS are handling this very cleverly – getting existing PS holders to bid the coupon of the new note and indicating (although not committing) that only ~ half of the existing S$ 1.5 Bln will be accepted for conversion into the new units.
My quick scan leads me to believe that tendering for conversion to the new Capital Securities is a no-brainer, viz. six advantages:
i) potential to earn a (slightly) higher coupon,
ii) resetting (not necessarily a step-up) of the coupon every five (5) years if DBS does not exercise its call option – this gives a degree of protection against rising SOR’s,
iii) The subordination ranking of the new paper is superior to the existing paper,
iv) DBS apparently has the right, subject to what appears to be “slam dunk” regulatory approvals, to call the existing paper at par – vs. the current price ~ S$ 102………… and to do so anytime as from now.
v) First call date of new paper is ~ 17 months ahead of the 22 October 2020 date of the existing paper.
vi) Issuer of the new paper is the Holding company not DBS Bank Ltd,
I have probably missed something in the disadvantage department – but the way I see it is DBS aims to receive as much of the current issue tendered at the lowest new coupon – the threat of calling the remaining existing paper at par in the near future will focus minds…………….. I’ll need to think on what coupon level I tender??!!
Cheers ……….. and thanks again
Hi JC,
Valid points.
Point vi) should be a structural subordination because h.c. not as credit worthy as bank.
If you don’t sell, you have to tender because it does not make sense to do nothing.
Yet, given that DBS would not want to risk alienating bond investors whom they depend upon to maintain their top ranking in SGD corporate bond issuance, there is a chance they may do another tender down the road for the remaining 900 mio.
Thanks Tradehaven – your pushback on point vi) is very good – you are spot-on – I was incorrect (and I note what Fitch said earlier today): http://www.reuters.com/article/2013/11/07/fitch-rates-dbs-group-holdings-basel-iii-idUSFit67568520131107
One thing I’m a little perplexed by is how DBS can justify to whomever bringing forward their call option date (to be clear: it is not a maturity date, rather its a DBS call option date – this is a perpetual after all) without rewarding PS holders in some manner – or is the “intermediate coupon payment” sufficient. I’m of the view that DBS may get a hard time from PS holders if they attempted to peg the coupon of the new paper at 4.7% (i.e. the same as the old stuff) yet wanted to enhance their own call capability. I know that DBS now say a coupon-reset will apply if they don’t call the paper in ……….. but still! Lets not lose sight of the fact that what is driving DBS to do all this is Basel III compliance and MAS’ directions around this.
Suppose I’m trying to justify why DBS should pay more than 4.7% p.a…………..
At 4.7%, it would be cheaper than the new UOB 4.9% (trading at 4.4/4.25%), which is the price of the holding company subordination.
I understand that DBS has to call the old bond because it does not qualify 100% for tier 1 anymore and it is a standard regulatory call option that exists in most issues that allows the bonds to be called if regulations changed that the bonds no longer qualify for capital.
There is a chance that they will prorate the 800mio (if more than 800 is tendered) and call the rest at 100, to be fair to all.
My other theory as I mentioned in the weekly Bonds in Conversation post is that “They have cleverly only decided to tender for less than half the outstanding amount. With the threat of a call back at 100, bond holders could be tripping over themselves to push the coupon level down, which will set a nice precedence for the next batch.”
Also remember there is a retail tranche that is not called yet. That batch which is trading at 107 level in the SGX can be assured to have a worse deal.
Hi tradehaven,
Thank you so much for sharing all the useful thoughts again.
May I ask the following:
a) what is the coupon for new preference share? Is it going to be a fixed value between 4.7-4.9 but not decided on the exact value yet or will it vary from 4.7 to 4.9 from one coupon payment date to the next?
b) If the new bond is not called in 2019, what will coupon be after 2019? Will it still be fixed between 4.7-4.9 or will there be a refix like the UOB 4.9 Preference share?
c) You mentioned “Also remember there is a retail tranche that is not called yet. That batch which is trading at 107 level in the SGX can be assured to have a worse deal.” What kind of deal do you think the retail tranche may get? Quite worried about it cos I got quite a fair bit of it from the secondary market just recently. 🙁
So sorry to be asking all these, cos I am really quite confused and worried now.
Thank you so much.
agreed on the likelihood of call…bonds have alr traded down to 100.5-101.25 (frm 102+)levels post announcement; that 50 cts+ of savings will not be worth creating an unsightly precedence for the brand name. furthermore, the dbs perps wld look good vs existing uob 4.9 perp trading at 4.2% ytc currently even with its 1 yr shorter call tenor …note tender is at a floor of 4.7% onwards in 0.05% denoms up to 4.9%, so there is some value proposition there
structural subordination aside, instruments before and after the tender are pari passu. bank has done a good job over the years and structuring of this swap of securites to buffer its capital is only further testament to that…
I am not sure is this a good time to buy and what is the price today?
Latest price I have seen for the DBS 4.7%’s is S$ 100.52. Dropped something like 180 basis points as compared to the pre-announcement price. So clearly Mr. Market doesn’t like this DBS move one bit. I know I’m not alone in having a sense that DBS is trying to “get away with” this Basel III compliance driven move on the cheap. Doesn’t leave a good taste in the mouth and I can only hope that DBS’ higher paid help now carefully considers the reputation impact of a) any further measures and b) decision making when it comes to selecting both the coupon of the new paper and the volume they will allow to be converted (which I note from the prospectus is also flexible).
Latest price I have seen for the DBS 4.7%’s is S$ 100.52.
Dropped something like 180 basis points as compared to the pre-announcement price. So clearly Mr. Market doesn’t like this DBS move one bit. I know I’m not alone in having a sense that DBS is trying to “get away with” this Basel III compliance driven move on the cheap. Doesn’t leave a good taste in the mouth and I can only hope that DBS’ higher paid help now carefully considers the reputation impact of a) any further measures and b) decision making when it comes to selecting both the coupon of the new paper and the volume they will allow to be converted (which I note from the prospectus is also flexible).
Thanks again Tradehaven,
The way you think through these things so clearly is excellent and I much appreciate your sharing of your thoughts so openly.
The dilemma your posting of 2.57 pm today 9th November raises is exactly the one that DBS are playing so cleverly to, i.e. PS holders will fear not getting their holdings converted – and eventually called by the issuer at par – and they will therefore “bid” for the lower coupon levels. The question is: Do I bid for a coupon above 4.70%, with the risk that my holdings will not get converted and called at par? I must admit I’ve not figured it out yet!!
I do wonder about the retail tranche (although I don’t hold any of the retail units) ….. which I presume will eventually be the subject of a similar “conversion offering”……. Would DBS really drive the coupon of the retail tranche lower than the wholesale “accredited investor” tranche?? I’m not so sure.
May be I am putting too much faith in DBS Management’s desire/hunger to maintain their reputation.
Thanks again Tradehaven.
Hi JC,
Thanks for the compliment. You can suppose that I have come from the other side of the fence and therefore am able to see it from their perspective.
The retail tranche will probably be called eventually, I would imagine. The difference between this situation and the UOB 5.05% issue is that UOB did both out of the same tranche. In this case, the 2 DBS bonds are different. And note that UOB only replaced the SGD 1.32 bio with 850 mio, leaving room for a new retail issue in the future which will probably come at a lower coupon than the 4.9% that they paid in July given that the bond is trading at 4.56%.
Retail issues typically pay lower coupons if you recall the SIA 5Y 2.15% retail issue done in 2010. The bonds are trading at 1-1.2% level now which is close to HDB prices.
It would not be too hard for DBS to consider playing hardball because 1. captive audience in Singapore – they have been the largest originating SGD dollar bank since the beginning of time 2. investors have short memories and 3. FNN is taking most of the limelight away from them at the moment. This is my sardonic slant.
The truth is that you are probably right and they will do the right thing to maintain their reputation i.e. pay a decent coupon (higher than UOB perp level) but probably prorate the new issue to award each investor less which is a fair ending.
Good luck !
The price I was quoted for selling my DBS 4.7’s today was 100.29 plus brokerage – I would end up with slightly above par plus accrued interest. The price of the 4.7’s is now down slightly more than 200 bp’s as compared to the pre-announcement price (a full 2%).
I can only conclude that DBS’ actions have spooked the market! The crafting of the conversion scheme is seen as too cute and too crafty by others more knowledgeable than I that I have spoken with. I wonder how many punters changed horses and bought into UOB’s 4.75% perp today?
Which broker are you using for quoting DBS 4.7% at 100.29? My broker was quoting 101.55 for buying plus comm, is this too high?
I think his 100.29 is the bid and your 101.55 is the offer.
As usual Tradehaven …… you are correct.
Indeed the price of S$ 100.29 that I quoted was the bid price. But if your broker is quoting you S$ 101.55 (the offer price) plus brokerage to buy, I believe that you may want to look elsewhere – the typical buy-offer spread of this paper (which has more liquidity than most S$ bonds & preference shares) is rarely above S$ 0.6-0.65, so I would suggest that you may be able to get this paper at ~50 – 60 bp’s less than your broker is offering.
And the price has gone down further …… the
latest bid price I have seen is S$ 100.185, now 220 bp’s below the pre-announcement bid price. Groan!
Rationale for you although I am not sure if I should be giving advice.
There is a 1 month notice on the call so you will get a coupon of 0.39%. So 100.39 would be the breakeven price.
But it is all relative to what other investment opportunities that you may have..
Is the retail issue affected? Or does this only applies to the OTC version?
The retail issue is not affected. It is a separate bond unlike the UOB 5.05%.
Hi Tradehaven and everyone!
I have one lot of existing DBS 4.7% PS. May I clarify if I do not submit a tender for an exchange for the new preference share, the earliest callable date for my existing old preference share will remain at 2020 November right? Which is a good 7 years from now?
If I am comfortable with running the risk of my existing preference share being called back earliest at 2020 November, I can choose to sit down and do nothing, or even buy more existing DBS 4.7% PS at near 101 price level right?
Awaiting for your enlightenment, please. Thanks in advance!
Sorry! I have just read the Invitation Memo. DBS has the right to call back the existing PS from 1 jan 2014 due to a change in statutory ruling concerning Basel III compliance.
Does this means if I buy DBS 4.7% now these can be call back by DBS anytime after 2014?
It would appear so but I have not read the Invitation Memo.
Yes.
And like I said in my previous comment, your breakeven is 0.39 cts a month.
The tender result for new DBS preference shares should be out today.
Anyone has more information to share?
All eagerly awaiting results.
OCBC 5.1% and the retail DBS 4.7% trading higher.
Haha…looks like keeping the existing 4.7% issue is a better option.
DBS prices first Basel 3 issue at 4.7%
At least it is over. The rest are yet to come.
DBS has done it again.
I think that they are calling an early redemption for DBS 4.7% (Oct 2020) on 21st March 2014.
regulatory par call