Metropolitan Bank & Trust Company (Metrobank) has surprised some by proposing to the first US dollar-denominated Basel III compliant Tier II bond in Asia ex-Japan, but commentators believe that it could achieve competitive pricing, helping domestic banks to fund ahead of the Philippine regulator’s aggressive implementation of Basel III norms.
The bank has just finished its roadshow to London, Hong Kong and Singapore for a 10-year non-call five Basel III compliant USD Tier II bond. The Reg-S deal will be up to US$500 million in size and J.P. Morgan and UBS are bookrunners. The proceeds will be used to refinance old style Tier II bonds worth PHP5.5 billion (US$126 million) callable in October as well as PHP4.4 billion callable in May 2014 and US$125 million in Tier I capital due in February 2016.
If the deal prices well for the issuer, other Philippine banks could try to refinance their own outstanding Basel II compliant capital. Competitive pricing is likely, according to FIG analysts, and bankers are already in discussion with Rizal Commercial Banking Corporation (RCBC) and Banco de Oro (BDO) regarding possible deals.
Outstanding bonds from Philippine banks provide a benchmark, and the market seems to be pricing new style Tier IIs anywhere from flat to 100 basis points (bp) wider than the equivalent old style bonds, said one financial institutions group (FIG) analyst. In terms of comparisons for pricing, Metro Bank doesn’t have senior bonds, but BDO and RCBC do.
“If you look at the senior bonds you have the RCBCs and the BDO 2017s with a 3.5% to 4% yield, so if you extend that for one or 1.5-year duration with the pick-up from subordinated to senior at a two times multiple you’re looking at the high single digits, which I think is feasible for a ‘BB’ rated bank,” they said.
The subordinated to senior ratio for callable bonds varies across the region, but in the Philippines is around two times, which would factor in the extension and the subordination risk.
“Some investors would say that is not enough but then the old styles are still trading quite wide, so given the limited supply issuers are getting away with pricing quite tight, even in the local currency markets.”
In addition to the supply-demand imbalance, Metrobank has several factors working in its favour. The lender is viewed positively by ratings agencies – Fitch Ratings for example has a positive outlook on its ‘BB+’ rating, as it has many of the quantitative and qualitative traits of higher rated banks globally, said Alfred Chan, financial analyst at the ratings agency.
In addition, there is a possibility that the sovereign rating will improve over the next one or two years from the current ‘BBB-‘, which is positive for Metrobank, he said. Equally, the bank is systemically important to the country because of its large domestic deposit base, which means there is a moderate probability that the state would offer extraordinary support, if necessary. In Asia, there has been no specific language around the trigger level and analysts believe this will be a positive for pricing.
“Especially for banks that are government owned the perk is that relaxed language gives bondholders some comfort,” said the FIG analyst.
Potential obstacles
To some, Metrobank’s roadshow is a surprise, as many expected the market to be tested first by some of the region’s highest quality names from more developed countries.
“It is a small bank with an aggressive write down structure so it’s interesting that it’s out there testing the market – we wouldn’t have thought they would be an obvious candidate and if we were on the deal we would have been encouraging others to go first,” said a banker away from the deal. “But it’s true that in the Philippines they’re under a bit more pressure than in other parts of the world.”
The central bank has sole authority when deciding whether banks are non-viable and if it does so, the securities will have to be written down to the extent needed to restore the viability of the bank. Because of this, there will be no full write-down language included in the bonds.
In the Philippines, the regulator’s treatment of legacy instruments is much more stringent than elsewhere in the region. Any instruments issued before 2010 will be removed from the capital structure on January 1, 2014. There are just three or four outstanding instruments issued in 2011 and 2012 that will be grandfathered, said a structured finance banker in Hong Kong.
In other jurisdictions, legacy instruments issued over the past 10 years will be phased out at 10% per year. So after three years, for example, a US$500 million deal would lose US$150 million under the Basel III rules. In addition, any securities with a step-up clause will remain legitimate until the call date, but if the bank does not use the call option it will become ineligible.
“So for that reason they will all need capital and that is why [Metrobank] is moving ahead so quickly. One of the interesting things is the Philippines has a lot of USD demand onshore, so if it’s only US$200 million or US$300 million that will mostly be taken up by onshore demand, meaning it’s not really an international trade,” said the structured finance banker.
However, a possible obstacle to onshore demand is that the Bangko Sentral ng Pilipinas (BSP) will make onshore investors sign so-called big boy letters, to confirm they understand the risk they are undertaking when buying the securities.
“I suspect that they will not care so much about offshore investors in Singapore or Hong Kong, so if the deal goes offshore then pricing will become a bit more interesting,” said the banker.
However, if Metrobank manages to complete the deal despite the regulator’s insistence on signed letters of consent, RCBC could re-launch its own Basel III compliant deal that was postponed earlier this year due to confusion over the impact of this requirement. The bank decided to raise funds via a private placement instead. Metrobank could not be reached for comment by press time.