Singapore banks offer world triple-A debt when it most needs

Customers use DBS Group’s ATMs in Singapore. The Singapore bank will meet investors in Asia, Europe and the US from Monday to discuss a euro or dollar-denominated bond offering, people familiar with the matter said.

BloombergSingaporeSingapore banks, among the world’s highest rated, are preparing to offer covered bonds for the first time just as demand for ultra-safe assets rises.DBS Group Holdings is meeting with investors to sell the type of debt, while United Overseas Bank said Wednesday it plans to start a programme in the second half. Covered bonds are typically higher rated and lower yielding because they’re backed by assets that remain on a lender’s balance sheet, allowing holders to make claims against both the issuer and the collateral in the event of default.Banks are competing with fund managers to buy the debt, which can be used to fill capital buffers more effectively because it carries a weight marginally lower than Treasuries. A review of the Basel Committee on Banking Supervision in March found that banks globally were still €305bn ($347bn) short of liquidity requirements. Monetary authorities are also chasing the bonds, with the European Central Bank snapping up €89.9bn of the securities this year.“Bank treasury desks are looking for stable assets and are likely to show strong demand for these covered bonds,” said Thomas Drissner, a Singapore-based investment manager at Aberdeen Asset Management, which managed $491bn as of March 31. “At the same time, a growing covered bond market would give investors an additional avenue to express varying appetite for risk across a bank’s capital structure.”Covered bonds have gained 0.34% since June 10, a Bank of America Merrill Lynch index shows, as the growing threat of a Greek default raises demand for safe investments. The Chicago Board Options Exchange SPX Volatility Index, often called the fear gauge, has jumped 10% over the period.“Markets are in clear de-risking mode,” London-based Luis Costa, an emerging market debt strategist at Citigroup wrote in a June 17 report. Fund managers “find themselves stuck in a world of uncertainty,” he wrote.DBS, Southeast Asia’s biggest lender, is rated only two levels below the highest grade at Moody’s Investors Services.UOB, at Aa1, is the second-highest grade. Covered bond structures are often rated several scores higher than the banks issuing them. Fitch Ratings assigned an expected AAA rating to DBS’s covered bonds and Moody’s gave it Aaa. Just nine nations, including Singapore, hold an AAA rating from all three international ratings companies.Excluding Australia, global investors haven’t been offered Asian bonds that had only AAA grades since July 2012, when Temasek Holdings, Singapore’s state-owned investment firm, issued $1.7bn of 10-year and 30-year debentures.“For regulatory reasons, and because ultra-high quality bonds are becoming rarer these days, financial institutions are likely going to be keener participants in these covered bond new issues,” said Swee-Ching Lim, a Singapore-based credit research analyst at Western Asset Management Co, which managed $455bn as of March 31.Stricter Basel III regulations count 85 cents of every dollar invested in covered bonds toward a bank’s liquidity coverage ratio requirement, a level second only to the full accounting treatment Treasuries, coins and bank notes receive.Banks needed to have met 60% of individual requirements by January 2015, and 70% by the start of next year. They should be fully compliant by 2019. The covered bond market began in 1769, when Prussia’s King Frederick let aristocrats, churches and monasteries raise money by pledging their estates as security. Denmark followed suit after the 1797 fire that destroyed Copenhagen. Singapore released guidelines some time later in December 2013, permitting its banks to sell covered bonds and capping issuance to 4% of their total assets. The island trailed Australia, which introduced a framework in 2011. Since then, lenders from the South Pacific nation have sold more than $83bn of the AAA-rated securities. The most recent dollar-denominated covered bond from an Australian lender was issued by Australian & New Zealand Banking Group on May 19. The five-year notes pay a premium over Treasuries of 51.7 basis points, 31 basis points less than ANZ’s plain vanilla 2.25% bonds with the same tenor and sold in June last year.DBS will meet investors in Asia, Europe and the US from Monday to discuss a euro-or dollar-denominated covered bond offering, people familiar with the matter said earlier this week. The bank has established a $10bn covered bond programme, it said in a statement.“The shortage of triple A-rated debt and the special regulatory place that covered bonds fill in terms of satisfying banks’ liquidity coverage ratios make the product quite desirable,” said Colin Chen, DBS’s head of structured debt solutions.