Oversea-Chinese Banking Corporation Limited Basel III USD Sub Notes

ISSUER: Oversea-Chinese Banking Corporation Limited   (“OCBC”)
ISSUER RATINGS (M/S/F): Aa1 / AA- / AA-
EXPECTED ISSUE RATINGS (M/S/F): A2 / BBB+ / A+
SECURITY DESCRIPTION: Basel III compliant Tier 2 Subordinated Notes
FORMAT: 144A/Reg S drawdown from Issuer’s GMTN Program
SIZE: USD Benchmark
TENOR: 10 Year Bullet
PRICE GUIDANCE: CT10+190bps area  (about 4.535%)
RANKING: Direct, unsecured and subordinated obligations  qualifying as Tier II Capital Securities
TRIGGER EVENT: Earlier of (i) the MAS notifying the Issuer in  writing that a write-off is necessary, without which the Issuer would become non-viable; and  (ii) a decision by MAS to make a public sector injection of capital, or equivalent support,   without which the Issuer would have become   non-viable, as determined by MAS
EARLY REDEMPTION EVENTS: Change of Qualification Event or for taxation reasons, subject to MAS approval
TERMS: SGX-ST Listing, $200k / $1k denoms, English Law (except subordination provisions governed by Singapore Law)
USE OF PROCEEDS: General corporate purposes
EXPECTED TIMING:  Today’s Business

KEY COMPS:
OCBCSP  A2/BBB+/A+     US$1BN    4.00%    10/15/24  T+208  G+198 (CALLABLE)
SUMIBK  Baa2/BBB+/BBB  US$1.75BN 4.436%   04/02/24  T+145  G+147
MIZUHO  -/BBB+/BBB     US$1.5M   4.6%     03/27/24  T+158  G+160
ANZ     A3/BBB+/A+     US$800M   4.50%    03/19/24  T+165  G+167
HSBC    A3/A-/A+       US$2BN    4.25%    03/14/24  T+135  G+137

That would work out to be a yield of just about 4.535% using this morning’s 10Y UST yield.

Their last subordinated USD issue was in early April at a coupon of 4% but let’s stop and take a breather here.  That USD sub was a 5Y callable issue done at 5Y UST + 245 bp and now trading at +208 bp and 3.88% yield.

Why is the 10Y paying less at +190 bp.

Because they are going for absolute yield which retail customers love to see and compare against and people are going for longer tenors. Insurance companies also welcome the longer date for them to match liabilities against.

Well, for a systemic bank like OCBC, subordinated is good enough, don’t you think ? It is just the issue of the yield.

UOB’s recent 6Y callable sub debt in SGD is yielding 3.45% and USD 5Y callable is dealing at 3.71%, for about the same ratings. The UOB recent SGD 4.75% 5Y callable perpetual is yielding 0.4% higher at 3.85%.

If we extrapolate the 5Y USD callable sub debts at 3.85% (UOB) and 3.88% (OCBC) using the US curve (SGD is almost the same) towards the 10Y rates, we should theoretically see a 0.95% pick up.

Getting 4.535% instead of 4.80% works out to be 3 cts on the bond price which means you are really buying the bond at 103 instead of 100.

But it does not work that way. For the recent ANZ (A3/BBB+) 4.5% 10Y USD sub debt is going at +165 bp and Woori Bank (Baa3/BB+)  4.75% 10Y sub debt is at +204 bp, and bullet bonds are favoured over callables.

Thus it is almost a foregone conclusion that customers will see lower than the 4.535% indicated and I suspect 4.375% would be a closer target. Still good but not good enough for me because I am expecting yields to head higher in the near term.

Incidentally, OCBC has raised USD 2 bio in bonds this year, enough to cover their maturing bonds of USD 1.1 bio and probably need USD 3 bio net in equity to be on the safe side.

Good luck.