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Two New SGD Bank Bonds: Which One To Buy?

United Overseas Bank (UOB) and Societe Generale (SocGen) are tapping the SGD bond market today with subordinated bond issues. For investors who have difficulty in deciding which one to look at, we offer comments on both bonds.

iFAST May 11, 2016

What's happening?

United Overseas Bank (UOB) and Societe Generale (SocGen) are tapping the SGD bond market today, with both offering new subordinated bond tranches. UOB has announced a new Basel III AT1 (Additional Tier 1) bond (Perp NC5) with an indicative yield of 4.25%, while SocGen's new bond issue is a Basel III Tier 2 (10NC5) with an indicative yield of 4.5%. We take the opportunity to compare the two issues and highlight some similarities and differences.

Difference in subordination

While both bonds are subordinated tranches of bank debt (and entail some write-down provisions in the event of non-viability of the bank), investors should note that UOB's new bonds are AT1s, which are the most subordinated tranche of bank bonds. UOB's AT1s are perpetual in nature (and thus have no firm maturity date), and have loss absorption features which may entail a write-down of principal if MAS decides that UOB is no longer viable (or requires a public sector bail-out). Investors should also note that the issuer has the right to defer interest payments on a non-cumulative basis.

SocGen's Tier 2s are a less subordinated tranche of bonds, with AT1s expected to take the first hit if the bank runs into trouble. Nevertheless, investors should also note that the Tier 2 notes also have loss absorption features if regulators decide that it is necessary to impair all subordinated tranches of a bank's debt.

Credit ratings

Given that both bonds are subordinated, their bond issue ratings are lower than their respective issuer ratings. UOB currently sports credit ratings of Aa1/AA-/AA- from Moody's, S&P and Fitch respectively, while the new AT1s are expected to be rated A3/N.R/BBB by the three respective credit rating agencies - this represents a 5 notch downgrade from the issuer rating by Moody's and Fitch, owing to the subordinated nature of the AT1s.

SocGen currently sports issuer ratings of A2/A/A from Moody's S&P and Fitch, while the new Tier 2 bonds are expected to be rated Baa3/BBB/A-, representing ratings which are 1-4 notches below their respective issuer ratings. Comparing the two issues by expected bond credit rating, the UOB AT1s are rated higher by Moody's (A3 versus Baa3 for SocGen), although Fitch is expected to rate the SocGen Tier 2 notes higher (A- versus BBB for the UOB). It may be worth highlighting that while the new UOB AT1s are not expected to be rated by S&P, the equivalent S&P rating for the UOB AT1s would be at BB+ (non-investment grade), representing a rating 7 notches below the issuer's rating.

Comments on yield guidance and spread

Both issues are priced against the same benchmark rate, the 5Y SGD Swap Offer Rate, which currently stands at 1.98%. At an indicative yield of 4.25% for the UOB AT1, this represents a 227bps spread, which is more than the 151bps issue spread for OCBCSP 3.800% Perpetual Corp (SGD)s, the most recent AT1 SGD issue by one of the three Singapore banks. The OCBCSP 3.800% Perpetual Corp (SGD)s are currently trading at a spread of around 136bps (to swaps) for a yield-to-call of around 3.48%, which suggests that the pricing guidance for the latest UOB AT1 issue is fairly attractive relative to its peer (both have comparable issue and issuer ratings).

For SocGen's new Tier 2 bonds, the 4.5% yield guidance represents a 252bps spread over the 5Y SGD SOR; peer comparables include the recent ABNANV 4.750% 01Apr2026 Corp (SGD)s (priced at 271bps over swaps, currently quoted at 205bps over swaps for a YTC of 4.04%), the BPCEGP 4.450% 17Dec2025 Corp (SGD)s (priced at 216bps over swaps, currently quoted at 218bps over swaps for a YTC of 4.15%), and BNP 4.300% 03Dec2025 Corp (SGD)s (priced at 188bps over swaps, currently quoted at 179bps over swaps for a YTC of 3.74%). Given that SocGen's ratings are similar to that of BPCE (and superior to that of ABN Amro), the 4.5% yield guidance looks rather attractive in the context of the non-local bank SGD Tier 2 comparable universe.

Which bond to consider?

In our opinion, the new SocGen Tier 2 bonds are the more attractive proposition, with the 252bps spread (based on initial guidance) representing good value versus other Tier 2 peers. In addition, while Tier 2s have loss absorption features, they are not the most subordinated tranche of bank debt - 4.5% for an investment-grade rated security appears to be fairly generous at present.

UOB's pricing at 4.25% (indicative) may appear more attractive relative to a direct peer comparable, the OCBCSP 3.800% Perpetual Corp (SGD), but investors should be cognisant that this is a highly subordinated debt tranche - the bonds would be rated non-investment grade by S&P (if a rating were requested). In addition, Singapore's local banks appear to have a lower cost of funding for their AT1s, possibly due to investor familiarity - recall that OCBC's 3.8% AT1 issue last year was the lowest cost of funding for any AT1 debt issue. While this low cost of financing is certainly good for the bank, the same may not be said for investors.



This article was provided courtesy of iFAST. iFAST Corporation operates in Singapore, Hong Kong and Malaysia as iFAST Financial Pte Ltd (Singapore), iFAST Financial (Hong Kong) Ltd and iFAST Capital Sdn Bhd (Malaysia) respectively and is licensed by the local financial market regulator in each respective jurisdiction.

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