UOB Ltd to issue new Tier 2 SGD-denominated 12NC7 bonds at 3.75% indicative

What's happening?

UOB Ltd is looking to issue new 12-year Tier 2 SGD-denominated bonds, which will be callable after 7 years. The new bonds, which are expected to be rated A3/A+ by Moody's/Fitch, have been announced today with an indicative price guidance of 3.75%. This would be the first SGD bond issue from a bank so far this year, and comes on the back of UOB Ltd's FY16 earnings release last week, where it reported net earnings of S$3.1b for the year, which was 3.5% lower y-o-y FY15. We highlight some features of this upcoming bond issue, and share our thoughts on pricing.

Things investors should note on this new issue

Investors should be aware that these upcoming new bonds are Basel III-compliant Tier 2 subordinated notes which entail loss absorption features, where permanent and irreversible partial or full write-down of the principal amount of the bonds may occur in the event of the non-viability of the bank as determined by the Monetary Authority of Singapore (MAS). Investors should further note that this "non-viability" event includes the scenario where a public sector injection of capital or support by MAS is needed to keep the bank afloat. Hence, investors in these bonds could lose the entire investment amount in the worst case scenario. However, any write-down of these Tier 2 instruments will only occur after the bank's Additional Tier 1 (AT1) securities, a more deeply subordinated tranche of bank bonds, have been fully written off of or converted into equity.

These new bonds will be callable only after 7 years, with the coupon resetting to the prevailing 5-year SGD Swap Offer Rate plus the initial spread (of around 133bps) if it is not called. The issuer (UOB Ltd) is currently rated Aa1/AA-/AA- by Moody's/S&P/Fitch, while the bonds are expected to be rated A3/A+, with the lower ratings reflecting the subordinated nature of the debt obligation.

Thoughts on pricing

At the indicative price of 3.75%, we note that the upcoming new Tier 2 bonds would be the highest-yielding on a yield-to-call basis compared to where similarly-rated 12NC7 SGD Tier 2 bonds are trading at. Investors should note that while Standard Chartered SGD Tier 2 bonds (STANLN 4.400% 23Jan2026 Corp (SGD)) are yielding higher, at a YTC of 3.85% and with just under 4 years remaining to its first call date, the STANLN 4.400% 23Jan2026 Corp (SGD)s are assigned a rating of A- by Fitch, two notches below the expected rating of UOB Ltd's new upcoming Tier 2s. The new bonds are also attractive on a relative spread basis, which are wider than the initial spread (110bps over the prevailing 7-year SOR) of DBS Ltd's 12NC7 Tier 2 bonds issued last year (DBSSP 3.800% 20Jan2028 Corp (SGD)). The bonds also sport larger spreads compared to where other similarly-rated 12NC7 SGD Tier 2 bonds are currently trading at (64-130bps), making this issue attractive vis-à-vis its peers.

Table 1: SGD Tier 2 12NC7 Bonds