A deep market and a competitive swap market has made Singapore the preferred Asian capital for European banks to issue debt, especially Additional Tier 1 capital instruments like perpetual or hybrid bonds.
European Banks have chosen Singapore as one of their favorite market for boosting their capital in to comply with regulatory requirements. This year, European banks have sold almost $3 billion of debt in the Singapore dollar bond market, up from S$850 million in 2015.
«The two key reasons are investor and market diversification, as well as pricing arbitrage which translates into cost savings,» said Valerie Lee, Standard Chartered Bank executive director, Bond Syndicate, who was quoted in the «Business Times» (behind paywall).
AT1 instruments are securities with no fixed maturity and are deeply subordinated, ranking senior only to equity or common shares. One of the conditions for an instrument to qualify as AT1 capital is that it is perpetual. AT1 instruments include issuer call options (usually every five years), meaning that the issuer has the right but not the obligation to redeem the perpetual.
Mega Perpetuals Snapped Up
In the past three months, three European banks – French bank Societe-Generale, Swiss bank Credit Suisse and U.K.-based Standard Chartered – each inked mega perpetuals of S$750 million, taken up mainly by private bank clients.
In the first six months of 2019, European banks raised S$2.825 billion, of which AT1 accounted for S$2.25 billion. This already exceeds the amount for the whole of 2018 which was S$1.95 billion, including S$1.45 billion of AT1. In 2015, issues by European banks did not even cross S$1 billion - they totaled only S$850 million, with S$450 million of AT1.
«Beyond the three major currency markets (USD, EUR, and GBP), the SGD market has emerged to become the fourth largest for AT1 capital globally, and the only Asian currency market which offers international banks the opportunity to raise benchmark-sized AT1 capital at highly competitive spreads,» said Lee.
Favorable Swap Market
The swap market is very favorable to foreign bank issuances at the moment, a critical factor driving European bank deals here, said Clifford Lee, DBS Bank head of fixed income, who was quoted in the newspaper.
«The SGD cross currency swap rates are currently favorable for such bank capital issuances from recognized foreign issuers in the SGD bond market; the growing market acceptance that interest rates will stay low, and go even lower, has made bonds more attractive as an asset class,» Lee said.
The hybrid bank capital issues from stronger banks provide investors with the unique balance of the credit comfort of a strong underlying issuer and the higher yield of a subordinated instrument, he added.
