structure, which could result
in high variation of ultimate
losses across banks depending
on where the banks’ specific
exposures lie,” Moody’s said.
“ILFS has a complicated
structure, with the holding
company at the top owning
stakes in its financial services
arm as well as in multiple
subsidiary companies that
operate its infrastructure assets.”
The group has an overall
leverage of 9.8x and its
infrastructure business is the root
cause for the current distress.
Hemindra Hazari, an
independent banking analyst,
said IL&FS’s reliance on short-
term borrowings created a
mismatch with its long-term
infrastructure finance business.
“Now if IL&FS and its
subsidiaries do not have an
investment grade rating, they
will not be able to refinance
their short-term loans and the
whole business model collapses,”
he said. “It is unclear how much
IL&FS will recover from selling
assets.”
Singapore chokes on FIG feast
Bonds HSBC, ICICI add to glut of bank capital securities since mid-AugustBY KIT YIN BOEYSingapore’s bond market has
become saturated with deeply
subordinated bank capital after
absorbing three Additional Tier
1 issues in a little over a month,
spelling trouble for lenders still
in the market for funds.
HSBC HOLDINGS last week priced
S$750m (US$547m) AT1s,
bringing to S$3.25bn the sum
of bank capital bonds sold inthe city state since August 16,
when OCBC Bank sold S$1bn at
4% in the first Singapore-dollar
denominated AT1 offering in
over a year. DBS Bank followed
with S$1bn of 3.98% AT
notes on September 5, before
Commerzbank broke a Tier 2
drought that had lasted since
November 2017 with a $400m
4.2% 10-year non-call issue.
HSBC issued its securities
at 5%, slightly tighter than
initial guidance of 5.125% area.
HSBC was sole structurer and
bookrunner while DBS and UOB
were joint lead managers.
Under normal circumstances,
the combination of benchmark
size and pricing would have
been hailed as a success, but
in the wake of previous deals
comparisons were inevitable.
When HSBC launched its
perpetual non-call fives on
Monday, much of the liquidity
had been mopped up by the
two local banks. At 5.125%, the
initial guidance was at a spread
of 280bp over Singapore dollar
SOR, and yielded a pick-up of
about 50bp over the bank’s
existing 4.7% perpetuals non-
call 2022s, which were trading
at a yield of around 4.6% beforelaunch.
The wide spreads on the
new notes caused a sell-off in
the outstanding AT1 curve.
To make room for the new
paper, investors exited the
existing notes, sending their
yield surging to 4.95%. The
outstanding AT1 notes of OCBC
and DBS also saw some selling,
though it was more muted.
HSBC’s second AT1 deal in
Singapore pulled in final ordersof over S$1.4bn. This was a
shadow of the S$6.5bn book it
had drawn in its debut issue in
June last year, and about half
of what OCBC Bank and DBS
Group Holdings had garnered
for their respective S$1bn AT
issues in the past month.
Having hoped to clinch a
S$1bn size, HSBC went for the
low end of its S$750m–S$1bn
range to ensure investor
support.MARKET INDIGESTION
Bankers put the blame squarely
on market bloat.
“The market is suffering
from indigestion from the
supply of AT1 notes in the
Singapore dollar market,” said
a banker keeping tabs on the
deals. “There are other banks
looking to see if they can do
similar deals, but the market
will need to rest a bit and digest
current supplies before any
new deals can be done.”
At 5%, HSBC left a lot on the
table for investors, the banker
added, but it still could not
achieve the larger size.
ICICI BANK had hoped to
take advantage of the robust
demand seen for DBS, OCBCand Commerzbank’s deals and
was rumoured to have targeted
its first Tier 2 in Singapore at
high 4%, which bankers said
would have attracted negligible
interest.
The Indian bank, rated Baa
by Moody’s, on Wednesday
launched its first Singapore
dollar-denominated Tier 2,
expected to be Ba1, at initial
guidance of 5.375% area. It
priced S$100m at par at 5.375%,
suggesting that demand was
not there even at that yield.
Joint lead managers were HSBC
and Standard Chartered Bank.
Given investor aversion
to high yield, overwhelming
demand was not expected.
The unusual structure of the
bonds did not lend any more
comfort. The notes will reset
a year after the call in year
six to an initial credit spread
of 299.5bp plus the prevailing
four-year Singapore dollar SOR,
reflecting the remaining life of
the paper.
Investors are more familiar
with the typical structure
which has both the call and
reset in the same year to
enhance the possibility of a call,
which they see as reassuring.
A lead on the deal explained
that under Reserve Bank of
India regulations, the call and
reset were not allowed to be on
the same date. RBI documents
show that the issuing bank
“must not do anything which
creates an expectation that the
call will be exercised”.
Uncertainties over the
Indian banking sector did not
help either. Moody’s said on
September 19 that liquidity
issues at Infrastructure Leasing
& Financial Services were credit
negative for Indian banks. (See
News.)
Bankers however are still
confident that foreign issuers
will continue to seek windows
to raise bank capital in
Singapore, especially if they
can price inside their US dollar
curve after swaps. For daily news stories
visit http://www.ifrasia.comeased restrictions on corporate
overseas borrowing, in line with
Jaitley’s announcement.
Companies from the
manufacturing sector can raise
external commercial borrowings
of up to US$50m for a minimum
average maturity of one year,
down from three years under the
existing rules.
Some economists fear that
easing the ECB rules will
increase India’s overall debt
burden. ECBs already accounted
for around US$200bn of the
country’s external debt as of the
end of March, according to an
ANZ note on September 17.
However, some credit analysts
feel these measures will help if
the central bank increases the
all-in-cost ceiling for ECBs of
450bp over six-month Libor.
“There is a decent demand
for high-yield paper/loans in the
overseas markets which will
permit lower-rated corporates
from manufacturing sector to
come to tap the ECB route if the
RBI raises the all-in-cost ceiling,”
said Gopalakrishnan.
“The market is suffering from indigestion from
the supply of AT1 notes in the Singapore dollar
market. There are other banks looking to see if
they can do similar deals, but the market will
need to rest a bit and digest current supplies
before any new deals can be done.”